Broken Government

Published — December 10, 2008 Updated — May 19, 2014 at 12:19 pm ET

Student loan scandal costs students

Schools steered students toward “preferred lenders,” who bribed schools and charged students inflated rates

Introduction

Without proper oversight or enforcement by the Department of Education, the $85 billion student loan industry became tainted in scandal. In 2007, New York Attorney General Andrew Cuomo revealed widespread unethical relationships between schools and lenders, with colleges and universities accepting gifts and other inducements from loan companies. In turn, financial aid officers would steer students toward lenders on their “preferred lender lists,” often at inflated prices at the students’ expense. This gave a few loan companies a substantial advantage. Cuomo launched his investigation after receiving a complaint from a new lender that felt it could not fairly compete. Meanwhile, the Education Department remained conspicuously absent. In testimony before the House Committee on Education and Labor, Cuomo accused the department of being “asleep at the switch” and urged congressional action. Representative George Miller, chairman of the Committee on Education and Labor, called on Education Secretary Margaret Spellings to put an end to lender bribes and require full disclosure of school-lender relationships. Spellings responded that the focus of Cuomo’s investigation pertained to the private loan industry, an area outside her department’s jurisdiction, but she conceded that the practices conducted by the institutions were unacceptable. In the midst of the revelations, Theresa Shaw, head of Education’s student loan office, resigned after five years in the position, but told Spellings, “I had accomplished all that had been asked of me including . . . ensuring that proper financial management and internal controls were in place.” Thousands of students suffered as a result.

Follow-up:
In May 2007, the House passed the Student Loan Sunshine Act, which requires schools to adopt strict codes of conduct, bans all gifts, and ensures that students are getting the best possible deal on loans. Cuomo settled with a dozen student loan companies, including the eight largest in the country: Citbank, Sallie Mae, Nelnet, JP Morgan Chase, Bank of America, Wells Fargo, Wachovia, and College Loan Corporation. Some of these companies, along with several schools, agreed to give $13.7 million to the National Education Fund, which educates student borrowers. Twenty-six schools embroiled in the controversy have since adopted a code of conduct, and 10 planned to reimburse students more than $3 million. A department spokeswoman said that, in the midst of today’s economic downturn, they are “working tirelessly to ensure that students have continued access to federal student loans.”

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