Handcuffing States

Yesterday, we wrote that officials in Iowa are investigating whether aggressive marketing practices by the largest student loan provider in the state, and the cozy relationships it has developed with area colleges, have pushed students to take on unnecessarily high levels of expensive private student-loan debt. Specifically, Iowas Attorney General is examining whether strategies the Iowa Student Loan Liquidity Corporation, a state-affiliated nonprofit lender, has used to win student loan business such as providing payments to colleges that recommended its private “Iowa Partnership Loans” to their students — help explain why private loan borrowing has skyrocketed by rates five times as large as it has in the rest of the country.

Company officials say they are cooperating with this probe. But student loan industry lobbyists, as well as some higher education advocacy groups, are pushing for changes in federal law that could make it extremely difficult, if not impossible, for state officials to investigate and take action in these types of cases. These groups are hoping to persuade the U.S. Department of Education and Congress to explicity give the federal government the sole authority to monitor the relationships between colleges and lenders and determine whether the rights of students and borrowers have been violated.

These groups argue that in the wake of the “pay to play” student loan scandal that has dogged the loan industry over the last year, colleges and lenders are receiving conflicting guidance from the federal government and different states over the appropriate standards to follow. “Recent months have seen more than a dozen investigations of student loan marketing, the production of several reports, the promulgation of ore than two dozens Codes of Conduct, and the passage of State legislation on the subject,” the American Bankers Association, the Consumer Bankers Association, and the Financial Services Roundtable wrote in a letter to Education Secretary Margaret Spellings in September. Meanwhile, they note that the Education Department has come out with new rules on the subject, and Congress is proposing reforms as part of legislation it is currently considering to reauthorize the Higher Education Act.

Arguing that “the existence of multiple standards” will lead to great confusion for lenders and schools, the bankers’ groups calls on Spellings “to specifically endorse preemption of state and local law and regulation in this area and to promulgate a clear set of standards and enforce them vigorously.”

While laying out clear and consistent rules is an attractive goal, the bankers’ true motive for pushing preemption is clear: they want to handcuff state attorney generals, like Andrew Cuomo in New York, who have been working tirelessly to expose widespread abuses that have occurred in the federal and private student loan programs that have left financially-needy students vulnerable to predatory lenders. [Just this week, Cuomo announced a settlement with a federal loan consolidation company that was providing kickbacks to colleges for loan business, and released a new Code of Conduct designed to protect students against deceptive practices used by lenders that market private loans directly to them.]

For seven years, the political leaders at the Department of Education turned a blind eye as accusations of corruption in the student loan industry mounted. Even today, the Department has not disciplined a single lender for violating a current and long standing law that prohibits lenders from offering any direct or indirect inducements designed to secure business — not even Student Loan Xpress, which, as we discovered, gave insider stock to leading college officials, not to mention a senior Education Department employee, in order to curry favor.

Currently, the lenders and college groups are focusing their efforts on trying to get the Secretary to issue regulations that would preempt states from passing laws that would be more prohibitive than the Department’s rules on illegal inducements and the use of preferred lender lists in the Federal Family Education Loan (FFEL) program. Department officials have agreed to explore the subject as part of the negotiated rulemaking sessions it has called for early next year — which is a potentially worrisome development given the Bush Administration’s support for preempting state authority in other regulatory areas, often to the detriment of consumers.

But loan industry officials don’t want to stop at preempting states from taking action related to the federal guaranted student loan program. In a letter last month to the leaders of the House Committee on Education and Labor, the National Council of Higher Education Loan Programs, a group that represents nonprofit lenders including the Iowa Student Loan Liquidity Corporation, argued for preemption in FFEL and added, “The same need arises with respect to private education loans.”

Blocking state attorney generals from guarding their citizens from abusive practices by private lenders seems particularly dangerous to us, as so far, not a single federal agency has taken responsibility for overseeing the private loan industry.

Students in Iowa and across the nation depend on the government to protect them from predatory lenders. So far, the federal government has fallen down on the job. Let’s not handcuff state officials from looking out for them.