Sweeping the Student Loan Scandal Under the Rug

The student loan industry must think we all have very short memories. As part of their effort to derail legislation that would eliminate the Federal Family Education Loan (FFEL) program, lenders have been sharing talking points with Senators and staff arguing that the “pay for play” scandals that engulfed the student loan industry in 2007 were much ado about nothing.

“After thorough investigations by Congress and various state Attorneys General, there were no findings that any employee or a lending institution or school broke any laws, nor were there any criminal penalties levied,” lenders wrote in talking points — which Higher Ed Watch has obtained — that were distributed to Senate staff.

While that statement may have been technically true at the time it was first made, it’s a brazen sweeping under the rug of a scandal that outraged the American public, particularly college students and their parents. New York Attorney General Andrew Cuomo did charge about a dozen colleges and lenders, such as loan giants Sallie Mae and Nelnet, with violating federal and state laws, and filed lawsuits against them. But instead of fighting Cuomo, the student loan companies and schools quickly reached settlement agreements with his office that required them to change their conduct. In other words, they were not confident enough about the legality of their practices to defend them in court.

The lenders’ claim is particularly cavalier given that they were only able to avoid being penalized because of who was guarding the henhouse. Bush Administration appointees at the U.S. Department of Education with strong ties to the student loan industry simply looked the other way while lenders and college financial aid offices engaged in kickback schemes.

Despite all the evidence that lenders were routinely violating federal law by providing illegal inducements to colleges to win student loan business, the Education Department refused to discipline even a single one of these companies. The Department did not even consider penalizing 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.

However, with new leadership at the Education Department, the loan industry can no longer rely on the lax enforcement that allowed it to deny the significance of the “pay for play” scandal in its talking points. Case in point: late last month, the Department ordered the Iowa Student Loan Liquidity Corporation (ISL) to repay the federal government nearly $16 million after finding that officials with the non-profit student loan agency paid off the alumni association at one of the state’s flagship universities to steer borrowers their way.

At issue is an “affinity agreement” that ISL officials forged with Iowa State University’s alumni association in June 2006 in order to get it to exclusively market their federal consolidation loan product to its members. Under the deal, ISL agreed to pay the association $35,000 a year, and to make additional payments based on the number of completed consolidation loan applications generated through the group’s promotional efforts. For example, if the association was able to bring in 300 and 399 completed applications a year, it would be paid $25 per application. But if it was able to bring in 600 or more, it would get $75 per application.

The loan agency and the alumni association terminated the deal in May 2007, about two weeks after The Des Moines Register first reported on it. At the time, media attention on the student loan scandal was at its height, with revelations about sweetheart deals between lenders and schools coming out on almost a daily basis.

ISL officials have denied any wrongdoing. They say that federal regulations that were in place at the time allowed them to pay colleges a reasonable fee for administering their loans. But in its program review report on the case, the Education Department rejected that argument out of hand. “Based on the documentation reviewed, ISL’s payments exceeded reasonable compensation for costs and were based on loan volume in violation” of federal law, the Department’s investigators wrote. Because the violations were so “serious,” the report says, further penalties to the loan agency are being considered, including limiting, suspending, or terminating its future participation in the federal student loan program.

ISL is not the only loan company that is coming under scrutiny. In August, Nelnet revealed that the Education Department was investigating its past loan practices, and had, in an early draft program review report, found the Nebraska-based lender out of compliance “with the Higher Education Act’s prohibited inducement provisions.” It’s unclear when a final report will be released.

Nelnet was particularly aggressive in making exclusive deals with university alumni associations to recommend its consolidation loans to their members. In 2007, the Nebraska-based lender canceled the “affinity” arrangements it had with 120 alumni associations, as part of a settlement agreement with Attorney General Cuomo’s office. So it would not come as much of a surprise if this is one of the areas of “noncompliance” on which the Education Department is focused.

Given the Department’s recent actions and renewed interest in enforcement, the student loan industry would be well advised to drop this particular talking point if it wants to maintain any credibility on Capitol Hill.

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