After a five-month investigation into accusations that universities have been giving lenders preferential treatment in exchange for money, the New York attorney general who led the search agreed to halt the investigation in 36 universities and one major bank.
Many of the major players in the U.S. student loan market had been accused of creating an illegal conflict of interest between higher-education institutions and students, as part of a search launched in December by New York Attorney General Andrew M. Cuomo.
Settlement offers were made by the colleges and student-loan provider CitiBank, and the investigation has been dropped against them.
But the attorney general is still investigating conflicts of interest in university links with Sallie Mae, Nelnet Inc., EduCap Inc., the College Board, CIT Group Inc. and Education Finance Partners Inc.
The attorney general’s office said many schools arranged to receive a percentage of the value of loans that were referred to certain lenders in return for placement on universities’ lists of most-preferred lenders.
“Many schools were getting what we called kickbacks from lenders. This was not disclosed to students,” said Arthur Harris, press secretary for Cuomo.
He said he believes these colleges put their own financial interests ahead of their students.
“The school was obviously trying to negotiate not the best terms for its students, but the best for itself,” he said.
In New York and Pennsylvania, 36 colleges have adopted a code of conduct banning universities from referring students to certain lenders in return for payment from student loan companies.
UCLA lists Sallie Mae as one of its preferred lenders and has partnered with the company to provide student loans. No allegations have been made against UCLA as of yet.
Investigations surrounding these universities and major student lender Citibank have been dropped, following their adoption of the code of conduct.
Conwey Casillas, director of communications at Sallie Mae, said the investigations challenge legitimate competition to provide student loans.
“It’s important to understand that competition between lenders and the ability to compete for school business drives down costs for borrowers. It’s clear that students’ families are the ultimate beneficiaries,” Casillas said.
He said lenders’ ability to help schools manage services and prevent defaults on loans were another important reason for this kind of integration with the university.
“Federal regulations hold schools accountable if they have high defaults, so there is incentive for lenders and students to work together and make sure students pay back their loans,” Casillas said.
Cuomo’s office has criticized lenders for paying to appear on universities’ most-preferred lender lists.
About 90 percent of students choose their lenders from their school’s most-preferred lender lists, according to a press release from the attorney general’s office.
But despite their problems, Karen Fooks, director of student financial affairs at the University of Florida, said most-preferred lender lists serve the interests of students.
Without such lists, the student loan market would be more like the credit card market, she said.
“Companies would go straight to the students and they may end up taking loans with companies which have the most media savvy, rather than what’s in their interest,” she said.
Some education institutions have been criticized for staffing Student Finance call centers with representatives from loan lenders, who misleadingly claimed to represent the university.
“It’s a clear conflict of interest, because the student is really calling the company. Students are asking for impartial advice and they’re not getting it,” Harris said.
But counselors at UCLA’s Financial Aid Office said they represented the university, not any loan company.
Harris said universities not fully revealing their reasons for endorsing lenders could be harmful to students.
“Students implicitly trust the school, and if deals are going on in the dark, they may not get the best loan. It’s a case where information is power,” he said.
But Fooks said universities, even if working for students’ best interests, could suffer from these accusations.
“A lot of the negative press would potentially cause students to distrust any advice that they are getting. That’s what could be damaging,” she said.