Kickbacks: Two Wrongs Don't Make a Right

Apparently executives at Education Finance Partners didn't get the message.

Last week, New York State Attorney General Andrew Cuomo announced that he planned to sue the San Francisco lender for paying colleges to market its loans to their students. In the days since, some colleges, like Boston University, have cut their ties to the company. Others are likely to jump ship after the lawsuit is filed.

Still, officials at Education Finance Partners have refused to abandon their practice of paying universities a share of the revenue they make on each private loan taken out by the colleges' students.

Instead, the company, in a last-ditch effort to avoid litigation, vowed to provide greater disclosure to students. The company's concession, however, inspires us to highlight the extent to which students are in the dark about the arrangements.

Today, Education Finance Partners includes a line in its government-mandated Truth in Lending Statement that says that colleges "may receive a referral fee" for each loan they steer to the company. How many students ever take the time to read these statements? For that matter, when was the last time you read the fine print on your credit card bills?

The company says that in the future it will "add clear disclosures to its marketing materials and customer communications." In addition, it will start requiring colleges to use the proceeds they earn from these deals "for the benefit of students," according to Tamera Briones, the company's founder and chief executive officer.

Ask Ms. Briones why the company makes revenue-sharing agreements with colleges, and she'll tell you that she's doing it for the kids, particularly the least advantaged ones. Most colleges, she says, have been devoting the money the earn to their financial-aid budgets.

"Education Finance Partners provides these funds directly to schools because we believe schools are in the best position to know which students have the greatest unmet financial need," Ms. Briones said in a news release last week reacting to the New York Attorney General's announcement.

Financial aid administrators at colleges that have benefited from these deals -- and the lobbyists who represent them -- have also used this line of attack against Mr. Cuomo. "Students either receive increased aid or better services" as a result of these arrangements, Dallas Martin, the president of the National Association of Student Financial Aid Administrators, said in his own rebuttal of the Attorney General's actions.

But how do we know that's true? Education Finance Partners' announcement this week that it will require colleges in the future to use the proceeds to benefit students suggests that at least some colleges were using the money for other purposes. In addition, were colleges that devoted the earnings to financial aid doing so to supplement their student aid budgets, or to free up money to spend for other uses?

Regardless, executives at Education Finance Partners have not agreed to share the company's revenue out of the goodness of their hearts. They are doing so because it's been an effective business model for a relatively new loan company that is trying to compete in a market dominated by a small number of huge players, like Sallie Mae, which has its own sweetheart deals with colleges.

Higher Ed Watch believes that public policy makers need to take a serious look to determine whether Sallie Mae's bulk is impeding competition in the Federal Family Education Loan Program. And we are encouraged that Mr. Cuomo and Congressional Democrats are investigating the anti-competitive practices that Sallie Mae employs to insure its continuing dominance.

But as we tell our children, two wrongs don't make a right. Education Finance Partners shouldn't be providing kickbacks to colleges to win student-loan business. The time has come for the company to find a new way of doing business -- or face the consequences.