Lenders, schools may be too close

Officials look into whether students are being steered to loans that benefit colleges.

Published March 31, 2007

The financial aid office at a state university used to be pretty quiet, a place to fill out forms, chat with your adviser, plan your future.

Not anymore.

In recent years, some of the nation's largest financial institutions have moved aggressively for a piece of the $85-billion student aid market, selling both private and federally backed loans.

Suddenly, those aid offices - including some in Florida - are under the harsh glare of state and federal investigations over the question of improper relationships between universities and lenders.

The link between schools and lenders has grown closer and more direct in recent years.

Visitors to the financial aid Web site of Florida State University, for example, see a list of 11 preferred lenders - names like Sallie Mae, Citibank and Bank of America. At the top of the list is Florida State itself, which advertises itself as a lender with "excellent savings opportunities."

Not mentioned on that Web site is FSU's backer for those loans, Sallie Mae, which gave the university around $36-million in 2004 to issue federal loans to graduate students.

FSU officials said they would earn around $1-million a year from the deal, which could be used to finance more need-based loans for students who wouldn't otherwise qualify.

But the U.S. Department of Education believes some colleges and universities may be using such preferred lender lists to steer students toward loans that make the colleges money, rather than loans that make the most sense for students. Both the department and Congress have launched investigations.

New York Attorney General Andrew Cuomo went even further last week, announcing a lawsuit against one lender and an investigation of at least 60 schools for accepting "kickbacks," a percentage of loan proceeds or other services in return for a listing by the school as a preferred lender.

Florida university officials defend their practices but say a few wrongdoers may ultimately harm the reputation of all in the financial aid world.

"It creates this atmosphere of distrust," said Karen Fooks, director of financial aid at the University of Florida, which has no preferred lists and doesn't take part in "school as lender" programs that bring revenues to the school for each loan .

"There is a real incentive there for you to want to push your own loans at the exclusion of others, because it does generate a lot of revenue," Fooks said.

Inducements for business

Federal officials are taking a close look at the deals universities have forged with lenders. Under federal law, lenders may not offer "inducements," including payments, premiums or services of value, to secure loan applications.

In one case, that has drawn scutiny, Florida International University told lenders they would have to offer workshops, hold recruitment events and make periodic telephone calls to students to be included on their list of 10 preferred lenders, the Chronicle of Higher Education reported.

Last year, those lenders made 20,000 calls to FIU students with reminders about financial aid deadlines, the paper said.

At the University of South Florida, banks like Chase and Citibank from its preferred lenders list have sponsored fact sheets and other literature.

Lenders have also printed financial aid brochures and other materials at their own expense at the University of Central Florida. But officials insist that wasn't an illegal inducement, and they didn't steer students toward those lenders in return.

"Whenever our lenders do printing costs, those materials go directly to the students and families," said Gordon Chavis, an assistant vice president at UCF in charge of financial aid. "Their logos must be on those materials. We don't want any hint of impropriety."

The university does maintain a list of 11 preferred lenders, which officials described as a way for students to apply efficiently online for aid.

UCF also issues its own federal loans to graduate students with Nelnet, generating revenue and channeling it back into student aid. The university discloses that partnership, but not the financial arrangement, on its Web site.

"To my knowledge we don't generate revenue from anywhere else," said Lisa Minnick, associate director of financial aid. "We're not building revenue streams on the backs of our students here."

But up in New York, Attorney General Cuomo said he plans to file a civil fraud lawsuit against Education Finance Partners of San Francisco, which he accused of deceptive business practices and giving payments in exchange for steering students toward their private loan business.

"A preferred lender list ought to mean that the lender is preferred by students for its low rates, not by schools for its kickbacks," Cuomo said in a statement.

Among the colleges that took part in that arrangement were Boston University, Clemson and Drexel, with the latter earning $100,000 in a single year, he said.

In another example of the close relationship between schools and lenders, the New York Times reported that several lenders, including Sallie Mae and Nelnet, operate call centers at more than 20 universities on behalf of financial aid offices.

While the companies receive a fee to operate the centers, critics including Cuomo say the phone operators often don't identify themselves to students as company employees, which poses a conflict of interest.

Both Congress and the federal Department of Education are considering rules that would force universities to fully disclose arrangements they've made with lenders, including revenues they earn.

And Sen. Edward Kennedy, D-Mass., chairman of the Senate Health, Education, Labor and Pensions Committee, has asked 16 student loan companies to provide a detailed reckoning of their financial arrangements with colleges.

While many Florida public colleges and universities maintain preferred lender lists, several officials said they believed instances of lenders making improper payments were relatively rare.

"But it still creates the appearance of a conflict of interest," said Fooks of UF. "It could be argued that you're encouraging students to borrow who otherwise would not."

And Fooks said she knows of colleges that recommended loans at higher-than-market rates, or published preferred lender lists in which the true identity of lenders was obscured.

"I don't believe there are huge amounts of graft or corruption, but students should never be directed toward any loans," she added. "It really should be the students' choice."

Tom Marshall can be reached at tmarshall@sptimes.com or (352) 584-5537.

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For more information on the pitfalls of financial aid, visit www.finaid.com, an award-winning nonprofit Web site.