Lawmakers Are on the Student-Loan Warpath
On May 7, 2007, the Minneapolis Star Tribune reported:
"To Frank Loncorich, there's nothing wrong with the trips that are paid partly or fully by the preferred providers of college loans to St. Cloud State University students.
"The St. Cloud State financial aid director has attended several conferences in Florida and two in California, at which lenders paid for his lodging. And there are the annual weekends in Bayfield, Wis., and excursions on the St. Croix River.
"Loncorich [also] has served on the advisory board for Academic Funding Group, a [Minnesota]-based lender on St. Cloud's preferred list.
"Asked if Loncorich's involvement with preferred lenders was legal, Melinda Voss, a spokeswoman for the parent system of St. Cloud, said it would be inappropriate for her to comment without knowing all the facts."
(Steve Brandt & Kara McGuire, Colleges looking at connections to lenders, Minneapolis Star Tribune [May 7, 2007]).
Before his interview with the Star Tribune, Loncorich probably should have called Lawrence W. Burt, the now-former associate vice president and director of student financial services at the University of Texas at Austin, who was recently dismissed by the university following an investigation into allegations of impropriety in his office. Among the allegations leveled against Burt were that he owned stock in a student-loan company that appeared on the university's list of "preferred lenders," to which Burt's office referred students for loans, and that Burt approved the university's preferred-lender list based on factors that were not necessarily in the best interests of the students.
Loncorich also may have considered calling Walter Cathie, the dean of financial aid for Widener University (Pa.), who was recently placed on leave amid allegations that he received $80,000 from the lender Student Loan Express since 2005, or, perhaps, David Charlow, of Columbia, who was dismissed by the university amid allegations that he "promoted a student-loan company in which he had a stake," or, finally, Ellen Frishberg, the financial-aid director at Johns Hopkins University (Md.), who was dismissed amid allegations that she received about $65,000 in consulting fees and tuition payments from a lender in which she had an ownership interest.
And then there are the settlements. To date, the New York Attorney General, Andrew Cuomo, has reached out-of-court settlements with, among others, Education Finance Partners ($2.5 million), SLM Corp. ("Sallie Mae") ($2 million), Citigroup, Inc. ($2 million), the State University of New York, St. John's University, Salve Regina University in Rhode Island, Molloy College (N.Y.), Pace University (N.Y.), Fordham University (N.Y.), Long Island University, New York Institute of Technology, New York University, St. Lawrence University (N.Y.), Syracuse University (N.Y.), Texas Christian University, and the University of Pennsylvania, the latter of which agreed to pay over $1.6 million to its students for loans issued over a two-year period. Nearly 3,000 University of Pennsylvania students will receive a student-loan reimbursement averaging $500. Adding even more fuel to the fire, on April 19, 2007, Cuomo publicly announced his intent to sue Drexel University, in Philadelphia, over its revenue-sharing agreements with one of the attorney general's specially targeted student-loan lenders--Education Finance Partners. Drexel subsequently entered into a settlement agreement with the New York Attorney General.
If the above is not enough to grab the attention of colleges and universities across the country, then maybe the following statement by the New York Attorney General will: "This office has been clear to schools: Settle, or we will commence litigation. Either way, we will get justice for students." With Cuomo's threats of litigation, and the proposed federal legislation entitled the "Student Loan Sunshine Act," there's a lot going on in the student-loan industry. Not wanting to be left out of the act, on May 31 the U.S. Department of Education itself released proposed rules that would set new standards for universities and ban lenders' marketing practices that in some cases have resulted in loan company payoffs to university officials. The rules would require universities to include at least three loan companies on any list of lenders they recommend to students, and it would ban many of the gifts and payments to financial-aid officials that lenders have been offering to win student-loan volume. The proposed rules will likely go into effect later this year. Does your financial-aid office and student-loan program comply with the New York Attorney General's Student Loan Code of Conduct? Would it pass muster under the proposed federal Student Loan Sunshine Act? Below, we tell you how to comply with both so that your college or university is not the next one to appear in the headlines.
The New York Attorney General's Student Loan Code of Conduct
In March 2007, the New York Attorney General and the University of Pennsylvania entered into an Agreement Regarding Student-Loan Code of Conduct (the "agreement"), one of several entered into between the New York Attorney General and institutions of higher learning and lenders including Sallie Mae. Under the agreement, the university and its employees are prohibited from accepting anything "more than nominal value" from or on behalf of any lender except that any university employee may conduct "non-university" business with a lender. This, of course, prohibits direct payments by a lender to the university to get on its preferred-lender list. This provision also prohibits officers or employees of the university from accepting any payment or reimbursement from any lender "for lodging, meals, or travel to conferences or training seminars unless such payment or reimbursement is related solely to non-university business." The university also may not receive any remuneration for serving as a member of an advisory board of a lender, or receiving any reimbursement of expenses for serving on such a board, except that participating as a member of an advisory board that is unrelated in any way to higher-education loans is not prohibited. The University further may not receive anything of value from any lender in exchange for any advantage in the university's educational-loan activity (i.e., revenue sharing, receipt of computer hardware at below-market prices, or receipt of printing costs or services).
To the extent the university creates and advertises a "preferred-lender" list, the agreement requires that the university must clearly and fully disclose the process and criteria by which it selected the lender. It also must state in the same font and in the same manner as the "predominant text" of the document that students and their parents have the right and ability to select the education-loan provider of their choice, are not required to use any of the lenders listed on the preferred-lender list, and will suffer no penalty for choosing a lender that is not included on the list. Further, the university must only determine which lenders appear on the preferred-lender list based solely on "the best interests of the students or parents who may use [the] list without regard to the pecuniary interests of the university" and review the preferred-lender list at least annually. The university must have each lender assure the university and all parent/student borrowers that all advertised repayment benefits will continue to inure to the benefit of the student or parent regardless of whether the loan is subsequently sold by the lender. Finally, the university must ensure that the lender discloses in the same font and text as the document any prior agreement with an unaffiliated lender to sell its loans to that unaffiliated lender and not place any lender on the university's preferred-lender list or otherwise favor that lender for a particular type of loan in exchange for benefits provided to the University or to its students in connection with a different type of loan.
With regard to staffing the university's financial-aid offices, the agreement requires that the university must ensure that no employee of a lender is identified to students, prospective students, or their parents as an employee of the university. Also, no employee of a lender may staff the university's financial-aid office at any time. Finally, where the university acts as an institution-as-lender under 20 U.S.C. ? 1085(d)(1)(E), the university must not treat the institution-as-lender loans any differently than if the loans originated directly from a non-university lender. Importantly, all sections of the agreement apply equally to institution-as-lender loans as if the loans were provided by a non-university lender.
The Student Loan Sunshine Act
According to the sponsors of the legislation, the proposed federal legislation, the "Student Loan Sunshine Act" (the "Act"), would, if adopted, apply to all student loans, including private educational loans as well as direct-to-consumer educational loans, and to all post-secondary educational institutions that receive federal funds. Like the New York Attorney General Agreement with the university, the Act would prohibit lenders from offering any gift worth more than $10 to a college employee; this would include a prohibition on free or discounted trips, meals, invitations to entertainment events, or other forms of hospitality. The Act, again like the New York Attorney General Agreement, also would prohibit lenders from offering services to financial-aid offices that would create conflicts of interest, such as lending staff to financial-aid offices during peak loan-processing times. It also would prohibit lenders from entering into arrangements with colleges and universities that would require the college or university to "brand" the lender's loan product with the college's emblem or logo.
With respect to the disclosure of lending relationships between lenders and colleges and universities, the Act requires lenders to report to the Secretary of Education any special arrangements that they may have with colleges and universities that make loans, including disclosing the terms of the arrangement related to marketing, recommending, or endorsing student loans, and any benefit, direct or indirect, provided to or paid to any party in connection with the loan arrangement. The Act also requires the Secretary of Education, together with members of the higher-education community and students, to develop a model format for reporting the terms and conditions of student loans, similar to, for example, the annual percentage rate disclosure required for other types of loans.
With regard to preferred-lender lists, the Act requires colleges and universities to include on their preferred-lender lists at least three "non-affiliated lenders," clearly and fully disclose why the college or university has identified a particular lender as a preferred lender, and, as with the New York Attorney General Agreement, the college or university must state that students do not have to borrow from a lender listed as a preferred lender.
The Act diverges from the New York Attorney General Agreement, however, in at least one important way. Unlike the agreement, the proposed Act also would encourage students to borrow through government programs, as opposed getting their loans through private lenders. The Act, for example, requires all lenders of direct-to-consumer private educational loans to clearly and prominently state that borrowers may qualify for low-interest loans through the federal government's student-loan programs. It also requires private lenders to disclose clearly (a) how the loan's interest rate is determined; (b) the sample loan costs disaggregated by type; (c) information regarding any and all loans fees; (d) information about collection in the case of default; and (e) information regarding better business and state consumer agency or state attorneys general complaints against the particular lender and the resolution of those complaints.
Before a direct-to-consumer lender can offer to a student an education loan greater than $1,000, the proposed Act requires lenders to notify the student/borrower's college of the amount of the proposed loan, so that the college or university can tell the student/borrower whether the loan exceeds the amount necessary to cover the student's cost of attendance after other aid sources are considered. Finally, the Act bars lenders from offering a private loan through a college (also known as an "alternative loan") until the college has informed students and parents of all their borrowing options under the federal government's Title IV loan programs.
should be avoided and design comprehensive governance policies.
Thus, it is easy to see that the regulation of college and university lending programs will increase under both the New York Attorney General's Student Loan Code of Conduct and the proposed Student Loan Sunshine Act. Further, the Attorneys General of other states are getting into the act. Notably, the New Jersey Attorney General recently issued subpoenas to all sixty-one in-state schools. Government oversight in this area is and will continue to be widespread and pervasive. The higher-education community will need to be proactive in designing programs and internal governance standards to meet this rising challenge.
Proactive Approaches to Compliance with Student-Lending Regulation
The federal- and state-government activity discussed above indicates a growing need for institutions to both identify basic conduct that should be avoided and design comprehensive governance policies going forward. The time to examine the conduct of your student-loan program is now. The time to implement a meaningful student-loan compliance program was yesterday.
The first item that must be addressed is revenue sharing between the institution and lenders. This issue is both the most painful to address, because revenue streams (when used judiciously and in the best interests of the student body) are critical to maintaining a successful institution, and most critical because of their potential to create conflicts of interest between colleges and universities and their students. The position of the New York Attorney General and the pending federal legislation is that future revenue sharing between colleges and universities and lenders should be completely banned. Past practices need to be carefully examined in this light to determine whether they are defensible under existing law and whether remedial action is necessary.
Similarly, colleges and universities and their employees should cease accepting anything of more than nominal value from a lender, except that employees still may conduct "non-university" business with a lender. Going back to the example of Frank Loncorich, this would prohibit all future remuneration for or reimbursement by a lender for his meals and lodging at lender conferences, his annual weekend trip to Bayfield, Wis., and his excursions on the St. Croix River, unless the remuneration or reimbursement was solely for "non-university" business. Again, past conduct needs to be reviewed and meaningful written policies for future conduct need to be established. Clear and precise written policies are critical in this area because, as detailed above, under both the New York Attorney General's Student Loan Code of Conduct and the proposed Student Loan Sunshine Act, universities and employees may still serve on lenders' advisory boards, provided that they receive no remuneration for their participation on the boards.
Other longstanding policies of colleges and universities also need to be reviewed and reconsidered in light of the current regulatory landscape. Lenders may no longer provide employees to staff financial-aid offices or student call centers, except that they may provide employees to conduct general debt-counseling or exit-loan interviews. Promissory notes may no longer be pre-printed with a preferred lender's name and registration number. Further, with respect to the creation of preferred-lender lists, all such future preferred-lender lists must be created and maintained solely in the best interests of the students.
Many of the issues that have been identified by the New York Attorney General arise from the apparent conflicts of interest created when an institution profits from an industry that may not be motivated by the student-borrower's best interests. This tension is complicated by the institution's inherent conflict between what is best for an individual student and what is best for the entire student body. Is it permissible, or even desirable, for an institution to share in profits obtained from an individual student and use those profits to assist other students in financial need? This type of policy question deserves careful consideration, and is best left to the policy experts. The subpoenas, seven-figure settlements, and threatened legal actions indicate that colleges and universities can ill afford to ignore the details of their present and historical student-loan policies while waiting for the answer from on high. The New York Attorney General has taken the position that it is the individual student-borrower who must be protected and at the very least informed of the details of his or her school's preferred-lending relationships. Congress appears to be of the same mind.
Every year thousands more students graduate weighted-down with substantial student-loan debt. The $85 billion student-loan industry makes a very attractive target for both the regulatory and enforcement community. Under these circumstances, every college and university must pay particular attention to complying with the comprehensive disclosure provisions mandated both by the New York Attorney General's Student Loan Code of Conduct and the proposed Student Loan Sunshine Act, as well as identifying any past conduct that may have run afoul of their provisions or existing school policies.
Only then, perhaps, will your college or university be able to take one big sigh of relief.