Spotlight turned on US loans industry

December 1, 2006

A power shift in Congress is bringing pressure to bear on the student borrowing business, reports Jon Marcus.

America's $17 billion-a-year (£9 billion) student-loan industry has come under scrutiny from the Democrats as they prepare to assume power in Congress.

The industry, a longtime ally of the newly rejected Republican majority, has been accused of everything from bribing university officials to profiteering from government subsidies.

The Democrats have called for the investigation of one loan company and for new laws that would impact on others. University financial aid officers may well be next on the hit list.

"Everything is starting to bubble to the surface," said Karin Pellmann, spokeswoman for MyRichUncle, a new loan company founded by two recent graduates of New York University who have made it their mission to shine a light on the practices.

Edward Kennedy, the Democratic senator who will chair the senate education committee, proposed a law requiring universities to disclose what deals, if any, they had made with loan companies in exchange for steering students to them for private loans. Students are not required to select from the lists of "preferred lenders" supplied by universities, but most of them do.

It is not illegal for companies that offer private loans for students to pay kickbacks to universities. But it is illegal for companies to do so if they offer low-cost, government-subsidised loans. Senator Kennedy called for an investigation into whether any of these companies were providing such inducements.

"We already know that the federal student-loan programme is filled with unnecessary subsidies for the big lenders," he said. "That's why I'm even more troubled when I hear of the aggressive marketing practices of some lenders who make private loans to students. We need to examine these practices and put a stop to any action that prevents students from getting the best deal."

Asked for specific examples of such kickbacks, Mr Kennedy's office cited a copy of an invitation sent by not-for-profit company EduCap to financial aid officers for an all-expenses-paid weekend at a Four Seasons resort in Nevis in the Caribbean in February. At least three universities have also admitted accepting cash in exchange for referring students to particular lenders, though one has suspended the process because of the growing attention it attracts. And several loan companies have acknowledged providing universities with a complicated range of financial inducements. They insist that the arrangements are entirely legal.

The New York Times reported that members of the National Association of Student Financial Aid Administrators (NASFAA) at their annual summer conference were given portable DVD players and iPods.

Some loan providers make direct cash payments. Education Finance Partners pays universities a cash bonus based on how much students borrow. Although the company will not name the schools that have received this money, Boston University conceded that it received $1,500 last year.

Although the amounts were small, Ms Pellmann said: "The fact that there exists this preferred lender list that doesn't actually offer the best rates for students is a problem. We're glad this is coming under scrutiny."

Financial aid officers have bristled at the suggestion that they would accept enticements in exchange for recommending a lending company. "We strongly disagree with this all-inclusive, undocumented characterisation," said Dallas Martin, president of the NASFAA.

He said that members of the NASFAA, "almost without exception", adhere to a code of ethics, and upbraided MyRichUncle for encouraging students "to question the trustworthiness and practices of all financial aid administrators and to ignore or bypass the available services and information that their offices provide".

Democrats have also targeted another private lender, the National Education Loan Network, which was found in a federal audit to have overcharged the Government $8 million for student loan subsidies.

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