By Bryan O'Keefe
No, CCAP is not sponsoring a "Hula Hut Happy Hour" despite how much fun an event like that surely would be. But, as the Wall Street Journal reports this morning, a "Hula Hut Happy Hour" was on the agenda of the Office of Student Financial Services at the University of Texas at Austin. The happy hour was, of course, sponsored by a private lender, and is now another chapter in the scandal over how such lenders influenced schools to gain a spot on their preferred lenders list.
What makes the most recent story outrageous isn't just the eccentric name of the happy hour, but rather that the financial aid office would actually rank lenders, "based on the number of lunches, breakfasts and extracurricular functions for entire OSFS staff. Lenders on the list were graded on the quality of their culinary largesse by metrics ranging from "very good" to "poor.""
This type of stuff is simply unfathomable -- an actual ranking system based on who gives out the best freebies? Students at UTexas at Austin should be up in arms over this (I imagine that they are.)
Meanwhile, the Washington Post has another salvo laying blame for the mess at the feet of the Department of Education, claiming that the Department was lax in its oversight role and that many Department officials have ties to the private student loan industry. Some folks quoted in the story however claim that proposed rules that would have clamped down on the private loan industry probably wouldn't have made much of a difference because lenders and schools would have found loopholes.
There is probably some truth to both sides of this. In hindsight, the Department should have probably regulated all of this activity better. But government regulation -- as is usually the case -- would probably not have stopped it completely. At some point, the lenders and schools themselves need to be responsible to the people they are supposed to be serving: the students.
I'd also note that the Post story is another blame-game type story. I don't doubt for one second that we need to get to the bottom of this, but, what about more comprehensive reform? Why can't we take this scandal and use it to propose something different from our current system?
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I figured this would happen when the sub-prime lending market was exposed.
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Lawmaker calls for FTC probe of student lending
By Ruth Mantell, MarketWatch
Last Update: 12:20 PM ET May 2, 2007
WASHINGTON (MarketWatch) -- A U.S. House lawmaker requested Wednesday that the Federal Trade Commission investigate the $85 billion student loan industry, citing lenders' unfair and deceptive marketing practices.
"Every day, millions of students receive marketing letters from private lenders -- letters that are often intentionally designed to confuse or mislead student," said Rep. George Miller, D-Calif., in a statement. "These tactics are nothing short of predatory lending. No company should be able to get away with using aggressive scare tactics to profit off students who are already taking on enormous amounts of college loan debt."
Last week, Miller, chairman of the House Education and Labor Committee, asked the inspector general for the U.S. Department of Education to investigate conflicts of interest among department employees, lenders and other participants in federal student loan programs. See full story. Margaret Spellings, secretary of education, is set to testify next Thursday before the committee.
The student loan industry has come under fire, hit by allegations that some firms have paid college financial-aid personnel to steer business their way. Brand-name financial and educational institutions have agreed to settlements.
The FTC's basic consumer protection statute provides that unfair or deceptive acts or practices in or affecting commerce are unlawful. Unfair practices are those that cause or are likely to cause substantial injury to consumers and are not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.
The House Education and Labor Committee said it has found examples of "unfair and deceptive marketing letters" that use what appear to be official government logos and threatening language, such as "failure to respond could result in higher monthly payments." Click here to view examples provided by the committee.
"Unfair and deceptive practices such as these cannot continue unchecked," Miller wrote in a Wednesday letter to FTC Chairwoman Deborah Majoras.
Ruth Mantell is a MarketWatch reporter based in Washington.
Related Story:
Congressman calls for education agency probe
By Ruth Mantell, MarketWatch
Last Update: 4:59 PM ET Apr 26, 2007
WASHINGTON (MarketWatch) -- U.S. Rep. George Miller, D-Calif., on Thursday asked the inspector general for the U.S. Department of Education to investigate conflicts of interest among department employees, lenders and other participants in federal student loan programs.
The request follows a Wednesday hearing of the House Education and Labor Committee -- chaired by Miller -- at which New York Attorney General Andrew Cuomo said regulation needs to be tightened on the $85 billion per year student-loan industry and blasted the Department of Education. See full story (will post).
"I am particularly interested in the extent to which the department informs, trains, or counsels existing and newly hired or appointed officials of federal conflict-of-interest statutes and standards of ethical conduct," Miller wrote.
In his letter, Miller asked John Higgins Jr., inspector general of the Education Department, to determine whether its policies, procedures, guidance and practices are adequate to ensure the absence of financial conflicts of interest among employees and officers who oversee the Federal Family Education Loan Program. Miller is concerned about department officials responsible for administering federal student aid holding stock in or having close ties to student-loan companies.
Specifically, Miller asked Higgins to review the six most recent years' worth of certain personnel financial disclosure reports, as well as other appropriate related records. Higgins should also examine all instances of confirmed violations of conflict-of-interest and ethics rules, and any disciplinary actions taken by the department, according to Miller's request.
Ruth Mantell is a MarketWatch reporter based in Washington.
Scandal fallout
N.Y. Attorney General seeks reform of student-loan practices
By Ruth Mantell, MarketWatch
Last Update: 3:10 PM ET Apr 25, 2007
WASHINGTON (MarketWatch) -- New York Attorney General Andrew Cuomo told Congress Wednesday that regulation needs to be tightened on the $85 billion per year student-loan industry in the wake of revelations of conflicts uncovered by his office, calling on legislators to enact the recently introduced Student Loan Sunshine Act.
The student-loan industry has come under fire, hit by allegations that some firms have paid college financial-aid personnel to steer business their way. At a hearing before the U.S. House Education and Labor Committee, Cuomo said the Student Loan Sunshine Act would "go a long way toward bringing the much needed disinfectant of sunlight to this tainted industry."
"I respectfully submit that it is crucial that Congress act promptly to end the conflicts, perks and revenue sharing that have been costing our students dearly," he testified. "I ask you to move quickly to ensure that, as another group of high school students look toward beginning their college educations in the fall, we have reform in place that will keep the students' interests paramount."
The act calls for increased disclosure about arrangements between lenders and education institutions, and encourages families to maximize their borrowing through the government's loan programs, among other items.
U.S. Rep. George Miller, D-Calif., who introduced the Sunshine Act in the House, said at the hearing that "little has been done to protect student and families from the abuses in the program." Miller, chairman of the House Education and Labor Committee, has also called on the Secretary of Education to "eliminate corruption and cronyism" within the student-loan industry with actions such as immediately imposing a moratorium on preferred lender lists, defining and ending bribes paid by lenders, and requiring full disclosure by lenders and schools of their relationships.
Earlier this week, U.S. Rep. Howard McKeon, R-Calif., co-introduced the Financial Aid Accountability & Transparency Act, legislation that would ban revenue sharing between lenders of private money and colleges or universities and asks colleges and universities to develop unique codes of conduct restricting gifts and payments, among other actions.
Cuomo also criticized the Department of Education and said its failure to pass adequate regulations is "disappointing and irresponsible."
"The reason the practices we have uncovered have been able to flourish nationwide over the past several years is because the U.S. Department of Education has been asleep at the switch," he testified. "The practices we have uncovered were not undiscoverable until now. Rather, the entity charged with maintaining the integrity of the student-loan market failed."
On Tuesday, U.S. Secretary of Education Margaret Spellings announced the formation of a Task Force on Student Loans to recommend new regulations. The task force is to report by May 31, with public comment planned for the summer.
**Questionable practices**
Cuomo has spearheaded investigations into the student loan industry, uncovering what he calls "an unholy alliance between lenders and many trusted institutions of higher education." Brand-name institutions such as New York University and the University of Pennsylvania, as well as Citigroup Inc., Citibank and SLM Corp. Sallie Mae have agreed to settlements.
"When and if the institutions direct students to lenders, the direction should be based solely on the best interests of the student and parents who may take out loans from the lenders," Cuomo testified. "Because of these revenue sharing arrangements, however, the institutions have a financial interest in the student or parents selecting the revenue sharing lender, regardless of whether that lender offers the best rates and service for that borrower."
A recent survey commissioned by TuitionCoach and conducted by Harris Interactive indicates that 50% of students and 50% of U.S. adults with high-school aged children living at home are unaware that they have the ability to negotiate college financial-aid packages.
Cuomo identified these practices as questionable:
- Revenue sharing, a kick-back scheme in which a lender pays a school a percentage of the principal of each loan taken out by a borrower. Institutions have a financial interest in students or parents selecting the revenue-sharing lender, regardless of whether that lender offers the best rates and service.
- Preferred lender lists that encourage students to borrow from the lenders who are listed. Some institutions fail to disclose the conflicts of interest of the financial-aid offices that compile the preferred lender lists.
- Improper relationships between lenders and financial-aid offices and administrators in which administrators have held stock in a lender, or received payment for consulting with a lender.
- Denial of choice of lender in which some schools have failed to make clear that borrowers have a right to select the lender of their choice, whether or not the lender appears on preferred lender lists.
- Undisclosed sales of loans to another lender.
- Quid pro quo opportunity loans in which lenders and colleges enter into high-risk, high-interest loans that hurt students. Lenders agreed to make loans to students with poor or no credit history, or international students -- who the lender claimed would otherwise not be eligible for the lender's alternative loan program -- and the institution provided concessions or promises that prejudice other borrowers.
Ruth Mantell is a MarketWatch reporter based in Washington.
But wait... There is more!!
CONSUMER WATCH
Skirting college-loan turmoil
How to find the right funding in the face of scandal, proposed laws
By Ruth Mantell, MarketWatch
Last Update: 7:49 PM ET Apr 23, 2007
WASHINGTON (MarketWatch) -- The student-loan industry is under a cloud, hit by allegations that some firms have been paying college financial-aid personnel to steer business their way. The scandal is just the latest twist in what has become an increasingly complex and frustrating process for parents and students in their quest to find ways to fund pricey college educations.
The growing concern over student lending has produced new regulatory proposals aimed at reining in the increasingly sophisticated marketing efforts used by private lenders. It has also sparked calls for parents and students to be more vigilant in looking after their own interests in the financial-aid process.
Companion bills have been introduced in the U.S. Senate and House that aim to protect students and parents from exploitation by requiring more disclosure from lenders about the deals they craft with colleges and universities. The bills would encourage families to maximize their borrowing through the government's loan programs.
"Lenders are increasingly using questionable methods to persuade colleges to steer students to their loans," Sen. Edward Kennedy D.-Mass., wrote in an e-mail response to questions. "In return, the colleges give an unfair advantage to the lenders." A co-introducer of the Student Loan Sunshine Act in the Senate, Kennedy says that too many students don't exhaust their federal loan options, simply because they don't know what funds are available or how to obtain them.
"Students need to know that low-interest loans are available through the government's loan programs," he says. "Our goal under the Sunshine Act is to provide students with honest, straightforward, adequate information."
Lawmakers are reacting to a flurry of revelations about questionable activity in the student-loan business. In recent weeks, Andrew Cuomo, New York's attorney general, announced investigations of more than 100 schools regarding "questionable conflicts of interest."
Brand-name institutions such as New York University and the University of Pennsylvania have agreed to reimburse a total of more than $3 million to students with money they were paid by lenders for loan business. The NYU and University of Pennsylvania settlements cover their relationship with Citibank, by which the schools received payments from Citibank on the basis of loan volume. Citibank has agreed to commit $2 million to a new national fund for educating students and parents about the student-loan industry.
SLM Corp., commonly known as Sallie Mae and the nation's largest student lender, has also agreed to a settlement that includes, among other actions, adopting a code of conduct governing student lending and contributing $2 million to educating students about loans.
**Full-service lenders**
One of the most important actions that students and parents can take to protect themselves is to get a loan from an institution that has the infrastructure needed to service that loan, says Barmak Nassirian, an associate executive director with the American Association of Collegiate Registrars and Admissions Officers.
"You want to borrow from someone who has the infrastructure so that you know who's going to be servicing the loan," Nassirian says. "It doesn't make sense to go with entities that are not really in the student-lending business. You don't want your loans to go to the lower bidder."
Citibank and Sallie Mae are examples of full-service institutions, he says.
As college costs have increased in recent years, federal financial aid has not kept pace, and the private market has blossomed, says Robert Shireman, president and founder of the Institute for College Access & Success, an education research and advocacy nonprofit based in Berkeley, Calif. Consumers must look carefully at terms, he says, to avoid a loan that is "no better than a credit card."
"What we're seeing are these aggressive efforts to gain a piece of the overall student-loan market," Shireman says. "I'm concerned about colleges that portray private loans as part of a financial-aid offer or award and are not clear that those loans may have very high interest rates."
**Early look at rates**
He warns that consumers should look closely at the rates early in the application process.
"Often loan companies...are asserting the interest rate is the best rate. But once you get into the process, it's not until a few months later they give you the details --and by that time you've taken so many steps you feel it's inevitable and that's the loan you sign up for," he adds.
Also, consumers should look beyond the advertised payment amount, which can be misleading.
"Don't focus on the payment amount that's described by a lender because that payment amount may be based on assumptions of paying over 20 or 30 years," Shireman says.
With increasing activity by private lenders has come more direct-to-consumer marketing over the Internet and regular mail. Borrowers can get overwhelmed by the system and various offers, experts say.
That's why financial-aid administrators should still play a role, says Larry Zaglaniczny, director for congressional relations with the National Association of Student Financial Aid Administrators.
The group maintains that the overwhelming majority of financial-aid administrators have the best interest of their students at heart. "Regrettably, there have been a few individuals who have evidently betrayed trust," he says, "and there have been a number of others where there is an appearance of a conflict of interest. "
Zaglaniczny advises families to speak to multiple sources for reliable aid information.
"If you want to double check something, go right to the director of financial aid," he adds.
Ruth Mantell is a MarketWatch reporter based in Washington.
From OSU - "The Lantern"
Conflicts of interest
State looks into loan practices
Issue date: 5/2/07 Section: Opinion
PrintEmail Article Tools Page 1 of 1 On April 13
Ohio Attorney General Marc Dann requested documents from all Ohio universities and 20 student loan companies in response to student loan investigations in New York that involved multiple cases of conflicts of interest.
The Lantern reported that Dann requested documents "relating to student loan providers including revenue sharing agreements, referral fee agreements, preferred lender lists, consulting agreements and lender marketing materials."
Dann's request came on the heels of New York Attorney General Andrew Cuomo's investigation into the questionable student loan market. Cuomo's investigation brought to light many conflicts of interest. One specific conflict of interest was universities receiving gifts from student loan companies for placing the loan companies on "preferred lender" lists. A press release from the Ohio attorney general stated preferred lender lists are "defined as lenders that have been selected by a school for recommendation to students or that have a relationship with students to provide student loans."
The Lantern praises Dann for his initiative to investigate student loan companies and universities in Ohio. So far, The Lantern reported, all universities have complied with Dann's request.
Many students depend on student loans to pay for their undergraduate and graduate educations. A university is cheating its students if it offers special treatment to a student loan company. It is doubly wrong for a university to accept gifts from the student loan companies.
Some students graduate with an insane amount of debt hanging over their heads. Universities accepting gifts for putting students further into debt are equally to blame as the student loan company offering the gift.
If student loan companies are in a conflict of interest, there could be criminal charges, Brian Laliberte, deputy first assistant attorney general, told The Lantern.
Ohio State has complied with the attorney general's request, but because OSU is a direct lender and does not deal with private lenders, it is unlikely the university will be in any violations.
The problem, Laliberte told The Lantern, is getting student loan companies to comply with the investigation. Subpoenas would be issued to companies who will not comply.
Again, The Lantern commends Dann's actions in the investigation. If student loan companies have nothing to hide, they should not have a problem turning over the requested documents. Hopefully, everything will turn out all right in Ohio.
Read more about this subject at:
http://news.google.com/news?sourceid=navclient&aq=Student%20loan%20conflict%20of%20interest&ie=UTF-8&rls=GGLJ,GGLJ:2006-34,GGLJ:en&q=Student+loan+conflict+of+interest&oe=UTF-8&um=1&sa=N&tab=wn
Or maybe we will get a good blog on what all this means right here by CCAP.
i just wanted to say that i found your posts this morning from "marketwatch" a lot more interesting than bryan o'keefe's blog. the reasons are because this story is much bigger then the university of texas and it appears the blogger penned his blog in a light-hearted manner at a time when students like myself are getting the shaft shoved up our bung holes. i was (maybe mistakenly) under the assumption that ccap was about affordablility as well as productivity. and here we have an affordability issue that is nothing less then the 800 lb gorilla in the room that has just been noticed. it will be interesting to see how things shake out. in the meantime, i would suggest that ccap do a bit more than a superficial scratching of the surface - this could be a great opportunity to make changes for the better so i don't have to live in a refrigerator box when i graduate. thanks for digging deeper cowboy.
Martin,
I doubt very much that Bryan O'Keefe, whom I don't know, wrote his blog in a light-hearted manner - although the Blog Title could certainly give one that impression.
I have always maintained that schools should NOT be in the lending business (I know I have posted such comments in much earlier Blogs). My thinking as such was my conclusion that schools have an unfair advantage in lending (read: FAFSA) and are an unnessary, and therefore unproductive third party. I also believed that there was motive and opportunity for shenanigans - which has now proven to be true.
Private sector lenders operate within the guidelines of our laws and banks have a whole specific set of laws for banks.
Some lenders, such as those who advertise on TV and the internet with "no money down", "interest only", and ARM's are categorized as "subprime" lenders. These lenders made idiotic loans that borrowers just couldn't afford, and really got the shaft with ARM's when interest rates increased. As a result, millions of borrowers who should have known better, got into housing that they just couldn't afford. As a result of this and the "Bankruptcy Reform Act" of 2005, these borrowers are defaulting on their loans and giving their homes back to the bank through the foreclosure process.
Having followed this because of my interest in investing, I believed and further believe, that the whole lending industry is going to go under the microscope and are going to be heavily scrutinized. Unfortunately, I also believe that this will lead to more band-aid government regulation rather then upholding current laws and prosecuting the crooks. But I digress.
I believe that CCAP will be all over this issue. But it takes time to "get your arms around" such a big scandal and understand the cause and effect. When they do fully understanding the issue, I believe Rich Vedder and Associates will have more to say (if they don't, I would be greatly disappointed).
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