March 23, 2007

Taking on Lenders and Colleges

New York Attorney General Andrew M. Cuomo revved up his campaign Thursday against what he just last week termed the “unholy alliance” between colleges and lenders. Not only did he announce an intent to file suit against the California-based Education Finance Partners (EFP) over the private loan company’s alleged “deceptive practices,” but he also named the names of 12 colleges allegedly accepting EFP’s “kickbacks": Baylor, Boston, Clemson, Drexel, Duquesne, Fordham, Long Island, Pepperdine, St. John’s and Texas Christian Universities, plus Washington University in St. Louis and the University of Mississippi. (Many more were unnamed: Cuomo said more than 60 such “revenue-sharing” agreements with EFP exist).

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“EFP aggressively offered schools cash kickbacks in exchange for business,” Cuomo said in a statement. He cited for instance the more than $100,000 Drexel University received in a single year (Officials there, including the president and press spokesman, did not respond to requests for comment late Thursday).

In a nutshell, Cuomo charges that the private lender paid institutions in exchange for preferential treatment and a spot on their lists of “preferred lenders.” (Preferred lender lists, provided to students and compiled by a university, are a powerful tool in shaping which companies students choose for a loan: Cuomo estimates that 90 percent of students choose lenders from these lists.)

Furthermore, the “revenue-sharing agreements,” also referred to by Cuomo as “kickbacks,” were often based on a tiered system, Cuomo said – meaning the more loans referred to the company by the college, the higher the percentage return on the value of the loan for the institution. Neither the colleges nor EFP adequately disclosed the financial terms of their agreements to students, Cuomo said.

“A preferred lender ought to mean that the lender is preferred by students for its low rates, not by schools for its kickbacks. With the cost of college rising every day, the last thing students want to hear is that their lender may be muscling aside a more competitive loan package,” Cuomo said.

The notice of the intended suit against EFP references deceptive practices in alleged violation of Executive Law Section 63(12) and Article 22-A of the General Business Law. Meanwhile, although Cuomo blasted universities, his statement didn’t indicate, one way or another, any action that would be launched against the institutions.

Cuomo’s announcement Thursday of what he tellingly describes as “the first” legal action to result from his nationwide inquiry into the $85 billion per year student loan industry, comes at a time of increasing scrutiny of the standard college/lender relationship. Just Wednesday, U.S. Sen. Edward M. Kennedy (D-Mass.) asked 16 lenders to submit documents about the companies’ dealings with colleges in the federal guaranteed student loan program. Cuomo made a request to more than 60 colleges and universities for information on their criteria for establishing preferred lender lists back in February. But if Sallie Mae’s strong rebuttal to a recent CBS report on the inquiries is any indication, lenders aren’t likely to take the punches without throwing a few back.

“While we appreciate that the Attorney General has given us five business days to explain why a lawsuit should not be filed, we question whether the Attorney General’s office is seriously interested in learning all of the facts and whether there has been an actual violation of law,” Tamera Briones, EFP’s founder and chief executive, said in a statement responding to the suit Thursday. Briones didn’t deny that colleges receive payments for referring students to the company, but said that it wasn’t wrong — and that, furthermore, the lender discloses to all borrowers that their colleges could have a “revenue share” agreement with EFP.

“Significantly, the Attorney General fails to mention in his press release that many colleges and universities use revenue share to fund student aid programs. Education Finance Partners provides these funds directly to the schools because we believe schools are in the best position to know which students have the greatest unmet financial need,” Briones continued. She added that the agreements do not affect the cost to the borrower.

Meanwhile, Dallas Martin — who, as president of the National Association of Student Financial Aid Administrators, sent a letter Monday to Cuomo criticizing him for his inflammatory rhetoric and dishonoring hard-working, ethical financial aid professionals — said that while he did not know if Cuomo’s concerns about improper disclosure have merit, nothing in the attorney general’s statement Thursday described a practice that appeared illegal.

“He uses the word ‘kickback.’ The word ‘kickback’ to me means that somebody took something under the table, put it in their own pocket. If in fact these institutions had negotiated a deal and they’re getting some money back and that money is going back into the institution to support their student aid program or to serve other interests, like keeping tuition down,” such a move would be akin to deals made by universities all the time, such as finding a sponsor for a scoreboard, Martin said. Such deals, he added, enable them to better support their constituency — students.

“I respect the attorney general’s opinion of looking into this, but I didn’t see anything that broke any laws or rules or regulations,” Martin said.

Cuomo took the aggressive tack of pointing his finger not only at EFP, but the universities too. In addition to pinpointing Drexel, which he said signed an agreement last year making EFP its “sole preferred private loan provider,” Cuomo further focused public attention on Duquesne and Boston Universities. He alleged that Duquesne receives 0.6 percent of the net value of loans referred to EFP, while Boston University receives anywhere from 0.25 percent to 0.75 percent of the net value, variable based on the total dollar amount of loans referred.

Bridget Fare, a spokeswoman for Duquesne, said that officials added a disclaimer to their preferred lender list Thursday disclosing the commission. She stressed that students are not pushed toward any provider, and added that all funds collected are redirected into need-based scholarships. Meanwhile, Colin Riley, spokesman for Boston University, said in a statement that the university only received about $1,500 from EFP over a two-year period and “we did not give preferential treatment as a result. In fact, EFP asked us to sign an agreement to actively promote them, and we refused.” In light of Cuomo’s concerns, Boston University officials decided to return the $1,500 to the company, and will not accept any more of their money, Riley said.

Meanwhile, a St. John’s University spokesman said in a statement that the $80,000 received from EFP over three years has been used to defray administrative costs in the financial aid office, and that the Queens university would continue to comply with the investigation. Statements from Pepperdine and Texas Christian echoed that willingness to cooperate.

“Ultimately, TCU will continue to cooperate with Mr. Cuomo’s office and comply with any change in practice, if necessary,” Texas Christian University’s statement reads in part. “However, the university firmly believes that it employs sound financial aid practices that benefit students and their families.”

— Elizabeth Redden

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