Cuomo finds "uholy alliances"

Yesterday, New York Attorney General Andrew Cuomo announced that there might just be something to all those allegations of “kickbacks” and “unholy alliances” between lenders and financial aid offices—alliances that in the end benefit colleges and lenders more than students.

Check out the full story here, and New America Foundation’s (perhaps too gleeful) commentary here. Cuomo didn’t offer details on which colleges and lenders might be involved, but he did provide this list of “problematic practices” in the loan industry:

• Lenders pay financial kickbacks to schools based on a percentage of the loans that are directed to the lenders. The kickbacks are designed to be larger if a school directs more student loans to the lender. And the kickbacks are even greater if the schools make the lender their “exclusive” preferred lender.
• Lenders pay for all-expense-paid trips for financial aid officers (and their spouses) to high-end resorts like Pebble Beach, as well as other exotic locations in the Caribbean and elsewhere. Lenders also provide schools with other benefits like computer systems and put representatives from schools on their advisory boards in order to further curry favor with the schools.
• Lenders set up funds and credit lines for schools to use in exchange for schools putting the lenders on their preferred lender lists.
• Lenders offer large payments to schools to drop out of the direct federal loan program so that the lenders get more business.
• Lenders set up call centers for schools. When students call the schools’ financial aid centers, they actually get representatives of the lenders.
• Lenders on preferred lender lists agree to sell loans to a single lender so there is actually no real choice for the student.
• Lenders sell loans to other lenders, often wiping out the back-end benefits originally promised to the students without the students ever knowing.

While there will be some out there who charge that Cuomo is looking to pad his political resume (it can’t be easy following Spitzer) by taking down the student loan industry, the whisperings of these problems existed well before he took office. Cuomo’s investigation should provide answers to some important questions in a debate that has been dominated for too long by accusations and invective—questions like which practices are most common and which schools and lenders are involved. These answers will help to determine if this is a widespread problem requiring industry-wide regulation or a problem of isolated cases that calls for better enforcement of existing rules.

I’m holding out hope that Cuomo’s investigation will provide the evidence needed to make some good policy decisions—decisions that will help students find the best loans, and better define the ethical line for lenders and financial aid officers.