Lender Bender: New York's Attorney General testifies on the student loan scandal
Friday, April 27, 2007
On Wednesday, April 25, New York Attorney General Andrew Cuomo testified before the House Committee on Education and Labor at a hearing on the unethical practices he has uncovered in the student loan industry. Cuomo's remarks outlined the findings of his investigation: employees of some colleges and universities have promoted certain private loans to students while earning kickbacks from the respective loaning companies. Furthermore, after a months-long investigation, Cuomo exposed financial aid officers who held stock in or had received gifts and incentives from lending companies, biasing their advice to students.
Cuomo said partnerships between administrators and for-profit lenders are "illegal, [they're] wrong, [they're] offensive," and pledged, "We're going to enforce the law." His testimony emphasized the need for immediate congressional action and conveyed a disdain for the inaction of an unresponsive Department of Education, which he lambasted as "asleep at the switch."
Cuomo indicated that schools such as Marist College, Drexel University, and the University of Pennsylvania were guilty of wrongdoing, and implicated lenders Sallie Mae and Citibank. In most of the cases Cuomo discussed, lending companies paid their way onto a "preferred lender" list that was then given to students, 90 percent of whom took the advice and chose this "preferred lender." Hence, students selected a company that did not necessarily offer the best deal.
In the course of answering the questions posed by committee members, Cuomo said these practices could be considered predatory lending. "There is a possibility of criminal charges in some of the cases we are investigating," he said.
Cuomo called the corruption he uncovered "a double whammy for students." First, by discouraging competition and thus not allowing students to choose the lowest-cost loan, universities and loan companies deceived students. Second, by increasing the cost of the loan with the added cost of kickbacks to university officials, lenders artificially raised the overall cost of student loans.
Cuomo has been able to reach amicable agreements with 16 schools and has brought four top lenders to settlements. He announced new agreements with Bank of America and J.P. Morgan Chase at the hearing on Wednesday, and agreements had already been reached with Sallie Mae and Citibank. These resolutions include rebates to students of up to $500--a figure representative of the additional cost shifted onto students due to the illegal payments to universities or financial aid officers.
Cuomo also stressed the neglect of the Department of Education, which he called "disappointing and irresponsible" for more or less ignoring the rapidly growing "Wild West" private student lending market. In the wake of the recent scandal, the DOE has proposed the creation of a task force, which Cuomo called an insufficiently aggressive response.
He conveyed the need for proper financial aid education and guidance for high school students and their parents, a need that can be met by using some of the funds recovered through legal settlements. When rebates to students are impractical, funds could be placed into an education fund the purpose of which is to inform high school students bewildered by the student loan process and inexperienced in debt and credit.
If you want to learn more about how you can investigate the relationship between student loan companies and your university, check out Campus Progress' step-by-step action guide for on-campus activism and journalism.
James is a junior politics and history major at Washington and Lee University. He is serving as an intern with the Center for American Progress's Speechwriting department, under the advisement of Teresita Perez.