NEWS SCOOP: New York State Attorney General Investigating Student Loan Deals

Higher Ed Watch has learned that the New York State Attorney General's Office has begun looking into the sweetheart deals that some lenders have struck with financial aid administrators to win student loan business.

In late December, the NYS Attorney General's Office sent an informal request for documents to Sallie Mae, the country's largest student loan provider, relating to the preferred lender relationships that the company has forged with colleges in the state. On a conference call with financial analysts today, Sallie Mae officials confirmed the report and said that the AG had made similar requests to other lenders that participate in the Federal Family Education Loan Program.

The Higher Education Act prohibits colleges from requiring their students to borrow from a specific bank or student loan company. But the law allows institutions to suggest "preferred lenders," and students almost always choose one of them. For that reason, lenders fight vigorously to appear on a college's preferred list and are often willing to cut generous deals to become the dominant loan provider on a campus.

News of the New York AG's interest in this issue comes at a time when preferred lender lists are coming under increasing scrutiny.

In recent months, the U.S. Department of Education has started its own informal inquiry -- sending letters asking some colleges that recommend only one or two lenders to explain how they chose those preferred lenders and asking the institutions to provide copies of any agreements they had signed with the lenders.

In addition, Department officials revealed last month that they had received tape recordings of some financial-aid administrators admitting that they had refused to allow students to borrow federal loans from lenders other than those the officials had recommended.

The Department is now considering barring colleges from recommending fewer than three lenders to students seeking loans. Such a move could have a sweeping effect. MyRichUncle, a relatively new lender that has caused waves by accusing financial-aid administrators of taking "kickbacks" and "payola" from lenders interested in their business, estimates that at nearly 750 colleges across the country, a single lender provided 95 to 100 percent of all federal loans available at the campus.

Meanwhile, Sen. Edward M. Kennedy (D-MA) is preparing to introduce legislation soon that would require colleges and lenders to provide detailed information about the arrangements they have entered into. The legislation, which is to be called the "Student Loan Sunshine Act," would also direct the Government Accountability Office to investigate whether some loan companies have violated a provision in the Higher Education Act that prohibits lenders from offering colleges inducements to secure applicants for federal loans.

Speaking on the conference call with financial analysts,Thomas J. Fitzpatrick, Sallie Mae's Chief Executive Officer, accused Kennedy of making "baseless attacks" on the company and other student loan providers. (Disclosure: Higher Ed Watch staff used to work for Kennedy.)

Mr. Fitzpatrick said that Sallie Mae was fully cooperating with the NYS Attorney General's Office and that he saw it as an "opportunity to counter some negative press accounts" that have questioned arrangements between colleges and lenders.

At Higher Ed Watch, we welcome the increasing scrutiny that policymakers are applying to these types of arrangements. Having hundreds of colleges recommending only a single lender to their students is inconsistent with both the spirit and the letter of student aid law. And some types of deals, particularly those that involve private loans, are putting financially needy students in harm's way.

We will revisit this topic of preferred lenders and private loans soon, with a closer look at the types of deals that are being offered, and steps that policy makers can take to combat problems.