Student loan scandal

Is your college getting paid to steer you in the wrong direction?
By DAVID S. BERNSTEIN  |  March 28, 2007

Six Massachusetts colleges find themselves embroiled in an unfolding student-loan scandal of unknown scope and consequences. The looming questions right now: are students getting screwed, and will anybody stop it?

New York State Attorney General Andrew Cuomo announced last Thursday that he plans to file a lawsuit against Education Finance Partners (EFP), a San Francisco–based lender. According to Cuomo, EFP has been paying as many as 60 schools — including Boston University and five others schools in Massachusetts — a percentage of all loans the institution steers into EFP’s hands.

Student-loan companies and colleges call this arrangement “revenue sharing.” Cuomo calls it a “kickback scheme.”

Cuomo’s complaint suggests that instead of helping students find the best loan rates, colleges would recommend “preferred lenders” who would then pay the schools.

For instance, EFP gives BU at least .25 percent of the value of all loans its students take with the company, the allegation charges. Becker College, Berklee College of Music, Bridgewater State College, Emerson College, and Mount Holyoke College had similar arrangements, according to Cuomo’s office.

That adds up to only a few thousand dollars or less each year for the school, which hardly seems like a big enough sum to seduce a large institution — but then again, if it isn’t a worthwhile incentive, why would the lender offer it at all?

Cuomo intends to charge EFP for deceptive business practices, because students were not told of the school’s incentives. The AG’s office has also sent letters of concern to colleges allegedly involved in such arrangements. And, it has warned that the EFP suit is only the first being filed in an ongoing “nationwide investigation into the college loan industry.”

Which begs two questions: just how many shenanigans such as this have been going on, and are students and former students paying more today after being steered to less-advantageous loans?

New York’s aggressive action, and the threat of liability in court, could help drive the industry to voluntarily improve its practices. It might also provide political impetus for a bill that Massachusetts senator Ted Kennedy filed two months ago, dubbed the Student Borrower Bill of Rights, which would require disclosure of relationships between schools and lenders, and also ban lenders from giving gifts to college employees. Or at least that’s what a Kennedy spokesperson hopes.

Unfortunately, Cuomo — much in the style of his predecessor, now-governor Eliot Spitzer — did not involve other states in his investigation; even such an obvious partner as Martha Coakley in nearby, college-rich Massachusetts was left out. As a result, Cuomo’s actions have drawn little attention.

On the Web
The Student Borrower Bill of Rights:

Related: Lender bending, The kids in the hall, Better by degrees, More more >
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