Fury over kickback allegation

May 11, 2007

Administrators in the US are embroiled in a student loans scandal that has rocked the nation. Jon Marcus reports

When cash-strapped students entering Johns Hopkins University this year needed private loans to help them pay their tuition fees, the university's financial aid office steered them to a short list of recommended lenders, including one called Student Loan Xpress.

Along with its rivals in the lucrative US student loan industry, Student Loan Xpress reaps the profits from a fast-growing, $17 billion-a-year (£8.5 billion) business that charges relatively high interest to finance spiralling education costs not covered by disappearing direct grants and lower-interest government-backed loans.

Although they are not required to, 90 per cent of students choose the loan companies recommended as "preferred" by their university financial aid offices. But these recommendations have become part of a scandal that is rocking US higher education.

Johns Hopkins student financial services director Ellen Frishberg was being paid consulting fees and travel reimbursements by Student Loan Xpress. Nor did Ms Frishberg have to worry about how to pay her own tuition fees when she attended a doctoral programme at the University of Pennsylvania because Student Loan Xpress picked up the tab.

In all, between 2002 and 2005 Ms Frishberg received $63,000 from the private lender, a widening investigation has alleged - all without the knowledge of those she recommended Student Loan Xpress loans to.

At least six university financial aid directors accepted payments from, and even held stock in, Student Loan Xpress, investigators now say. All, including Ms Frishberg, have been suspended from their jobs.

But the scandal is not limited to half a dozen universities or one lender.

Financial aid officials nationwide are now known to have accepted cash, gifts, trips to exotic destinations and sponsorships of things such as awards dinners and association conferences from lenders they recommended to their students. Some of these lenders charge interest as much as four times as high as the rates on government-subsidised loans. Some lenders simply made cash payments to the universities themselves.

Investigators call these payments kickbacks, pure and simple. Congressman George Miller, chairman of the House Education and Labor Committee, described them as "corruption and cronyism".

"Students should be steered towards lenders that will give them the best terms, not towards companies that send college employees on an all-expenses-paid Caribbean vacation," Mr Miller said.

One lender, EduCap, invited financial aid officers to an all-expenses-paid weekend at a Four Seasons resort in Nevis in the Caribbean. And members of the National Association of Student Financial Aid Administrators at their annual conference were given portable DVD players and iPods by companies soliciting their loan business.

"At a time when more and more students and families are relying on loans and incurring greater amounts of debt to pay for a college education, it is beyond shameful that some private lenders are courting colleges with gifts and incentives that often do not help students or parents," Mr Miller said.

Universities largely shrugged off the simmering criticism of their relationship with lenders until the attorney general of New York State, Andrew Cuomo, propelled it onto the front pages by demanding information from 400 universities that are in, or enrol students from, New York.

Some of the universities were alarmed to receive subpoenas, and Mr Cuomo announced that he would file suit against one, Drexel University in Philadelphia, which received $124,000 from a company called Education Finance Partners in exchange for making it the sole preferred source for private loans to Drexel students.

"A preferred lender ought to mean that the lender is preferred by students for its low rates, not by schools for its kickbacks," said Mr Cuomo, son of former New York Governor Mario Cuomo.

After first attacking the investigation as political grandstanding, universities have been quick to change their position in response to growing public anger.

At least 35, including the University of Pennsylvania and New York University, have accepted Mr Cuomo's demand that they abide by a code of conduct he devised and pay restitution to students equal to the amount of money they received from lenders. UPenn will distribute $1.6 million to students, and NYU $1.4 million.

The American Association of Universities has drafted its own "statement of principles" for relationships between universities and student-loan providers "to help guide campus leaders as they review these relationships in the wake of recent developments," president Robert Berdahl said.

Still, university officials are privately stewing at the word "kickback".

"Kickback means to me that someone took a bribe or received some sort of benefit for personal gain," Dallas Martin, president of the financial aid administrators association, said.

"If schools have negotiated agreements and they're getting some money back that is not at the expense of the borrower, and those funds are going into their student aid programme, then I think that is an acceptable use of the proceeds of such agreements."

In fact, several top university financial aid officers received considerable personal benefits.

David Charlow, senior associate dean of student affairs at Columbia University; Catherine Thomas, financial aid director at the University of Southern California, and Lawrence Burt, associate vice-president for student affairs at the University of Texas at Austin, each owned at least 1,500 shares of the parent company of Student Loan Xpress, which they listed as a preferred lender.

Walter Cathie, dean of financial aid at Widener University, was allegedly paid $80,000 by the company. Capella University financial aid director Timothy Lehmann allegedly got $13,000.

Mr Cuomo said he was considering filing criminal charges against some financial aid officers.

And while universities say it would be impossible to prove that their deals with lenders forced students to pay more in interest, at least one school that accepted money in exchange for listing a lender as "preferred" found that the resulting loans carried interest rates of more than twice the rate the federal government collects. It cancelled the arrangement. Other private companies charge nearly four times the government rate.

The national Government makes available about $70 billion a year in subsidised loans to university students, who are allowed to borrow up to $4,000 annually at 5 per cent interest from the primary loan programme.

Private US universities charge as much as $45,000 a year in tuition fees, and for room and board.

The amount of money distributed through private loans increased by more than 1,000 per cent in the past ten years as the cost of US higher education skyrocketed. Some private lenders charge as much as 19 per cent interest.

Yet, thanks in part to special arrangements with the universities, private lenders have faced little competition. On each of 300 American campuses, a single lender controls 99 per cent of all the private student loans.

Mr Martin and other higher education officials have tried to deflect attention back onto the federal Government, which they say should make more of its own loans available, reducing student dependence on private lenders.

"This leads to families having no choice but to use private loans, which have higher interest rates and fewer borrower benefits," Mr Martin said.

Mr Cuomo, a Democrat, also wants to put the focus on the national government. He said that the Republican Bush Administration had done little to protect students against lenders despite its promise to form a committee to study the issue.

"The Department of Education has been asleep at the switch," Mr Cuomo said.

The education department, he said, had been "remarkably weak" in its oversight of the industry.

And, as if more proof were needed, the chief federal government official responsible for regulating student loans, Matteo Fontana, has been suspended from his job. The reason? It was disclosed that he held at least $100,000 in stock in Student Loan Xpress.

AT A GLANCE: US STUDENT LOAN SYSTEM

* Grants are available to help cover the cost of tuition fees and come directly from universities or from the federal Government

* Federal Government also offers so-called Perkins student loans of up to $4,000 per year for each student, up to a maximum of $20,000, at 5 per cent interest. Smaller federal loan programmes also exist

* The Government earmarks a total of $70 billion for student loans each year

* Private lenders offer loans to students who need additional money to cover the cost of tuition fees and other higher education costs and are allowed to charge interest up to maximum of 19 per cent

* The private market has grown by an average of per cent per year since 2001 and is now worth $17.3 billion, 12 times as much as a decade ago

* Most university financial aid offices offer lists of "preferred lenders" from which students are encouraged to choose

* Nine out of ten students pick from preferred lender lists.

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