April 2, 2007

Cuomo Takes Aim at Colleges

With New York Attorney General Andrew M. Cuomo threatening legal action against them, an undetermined number of colleges and universities have signed settlement agreements in which they commit to changing their student loan practices and, in some cases, repaying disputed funds they received from lenders in the form of what Cuomo calls “kickbacks.”

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How many colleges and universities received the attorney general’s settlement offers and how many signed them is unclear; on Friday, as news of the settlement discussions emerged, Cuomo’s press secretary, John Milgram, said only that the attorney general’s investigation into the student loan industry is “continuing and expanding,” and that “if and when there are settlement discussions, we wouldn’t be discussing them” until they are finalized. He said he could not confirm an assertion by one source familiar with the investigation that the attorney general planned to announce settlements as early as today.

But several colleges in New York (including Pace University) and in other states (including Clemson University and the University of Mississippi) acknowledged having received settlement offers and/or discussing possible settlements with the attorney general’s office. And officials at at least one institution, Long Island University, said they late Friday that they had signed an agreement.

Robert N. Altholz, vice president for finance at Long Island, said Friday afternoon that officials there had received a proposed agreement just that day, and “been told we need to sign this by the end of the day today.” He declined to disclose the terms of the settlement document, citing a confidentiality clause, but said that in deliberations Friday, officials considered whether the monetary demands were comparable in scale to the $2,400 the university had obtained from its “revenue share agreement” with Education Finance Partners, as well as the reasonableness of the attorney general’s requests regarding the institution’s future relations with lenders.

Late Friday evening, Altholz sent an e-mail to a reporter confirming that the institution had signed the agreement and returned it to the attorney general’s office that by day’s end.

The settlement offers represented Cuomo’s first direct effort to hold colleges accountable for their role in what the attorney general, in announcing plans last month to sue Education Finance Partners for allegedly offering “cash kickbacks in exchange for business,” called an “unholy alliance between banks and institutions of higher education that may often not be in the students’ best interest.” In that way, his action against the colleges seems like an expansion of his campaign to reform the student loan industry.

Even so, the idea that Cuomo would take aim at colleges can’t be seen as a surprise: In the public pronouncement of his lawsuit against Education Finance, Cuomo went out of his way to mention numerous colleges as having received the disputed funds from the lender.

But the way he has pursued his action against the colleges suggests that the lenders remain his primary focus. First, the settlement agreements he has proposed do not impose any fines on the institutions, requiring them only to pay back the funds (and, through individual negotiation, possibly only a portion of the funds) they received from the Education Finance Partners and other lenders in exchange for giving the student loan companies a portion of their private loan portfolios. Second, the agreements do not require the institutions to acknowledge that they broke any laws (although the accords, as written, do list “violations” that “created a conflict of interest and violated” of the state’s consumer protection laws).

And lastly, the agreements commit the universities to cooperating “fully and promptly” with the attorney general’s continuing investigation into student loan practices. That led one observer close to the investigation to say: “I won’t say that he’s letting [the colleges] off easy,” but it seems like the attorney general will “look for a lot more from lenders.”

The attorney general is looking for significant concessions from the colleges to whom he is offering the settlement deals, and the decisions about whether to accept them are likely to vary significantly based on where the institutions are located and what they’d be forced to give up under the settlements, according to several college officials and student-loan experts familiar with the attorney general’s offers and willing to discuss them. A sample copy of the draft agreement was provided to Inside Higher Ed.

The settlement offers went out to colleges late last week, and sources familiar with the process said they were told that the attorney general had served subpoenas against them that threatened legal action against them if they did not accept the settlement agreements by a certain date (last Friday in the case of most if not all of the New York colleges, early next week for some institutions outside the state). “It’s clearly a legal strategy to force them to settle,” said one person knowledgeable about the discussions.

The threatened legal action would be brought under a New York law that the attorney general argues applies not only to colleges and universities within the state but to any college that state residents attend. The settlement agreements cite a wide range of practices that the Cuomo investigation has found to potentially violate the law, including “potential conflicts of interest” related to lists of “preferred lenders” that colleges maintain without fully informing borrowers and their families.

Among the practices cited are “revenue sharing” agreements between lenders and colleges, “denial of choice” to borrowers, exclusive loan consolidation agreements, undisclosed sales of loans to another lender, and “opportunity loan” arrangements in which lenders agree to make loans to students who might otherwise not qualify for them in exchange for a college’s business or other concessions.

One campus legal expert noted that the law contains a provision that gives a “clearcut exemption to any entity that is doing something that is permitted under a federal statute,” and that at least some of these alleged violations of New York law — notably the revenue sharing agreements — are legal under federal law.

But just because a college might have that or some other legal leg to stand on in fighting potential charges from the New York attorney general doesn’t mean that doing so would be the wise choice, and that, say several people familiar with the attorney general’s inquiry, may explain why colleges might leap at Cuomo’s offer — especially institutions in New York State.

“Some schools think that what they’re doing is legal, but feel that the hit on their reputation of protracted legal controversy with the state attorney general” could be significant,” said one person familiar with the situation. “They appear to be concluding that settling would be a better course of action.”

That decision may be somewhat less clear for an out of state institution that is less worried about its relationship with New York’s attorney general, or for institutions that might be loathe to give up practices that they believe truly help their students. Robin Denny, director of the Clemson University news service, for instance, said that officials there were discussing the draft settlement offer they had received with South Carolina’s own attorney general, among others. Denny noted that the university had received just $500 this year through its new relationship with Education Finance Partners.

The settlement agreements could require some institutions to change their practices significantly. Colleges and universities that sign the agreements would have to abide by a code of conduct in which they agree to:

• Ensure that no employees or contractors of a lender help staff university financial aid offices or are identified to students or borrowers as such.
• Avoid any agreement with a lender to provide “opportunity loans.”
• Limit “school as lender” arrangements.

The code of conduct does not bar institutions from having “preferred lender” lists, but it imposes significant restrictions on such arrangements, including requiring institutions to explain how they chose the lenders on the list and insisting that they clearly inform borrowers that they are free to choose whatever borrower they would like. Those charges are similar to proposals that have been made in legislation pushed by Congressional Democrats to clean up the student loan industry and in regulatory changes proposed by the U.S. Education Department.

While pursuing those sorts of changes through the threat of legal action might not be the ideal way for them to come about, said one person familiar with the attorney general’s investigation, “he has outlined good practices,” and he is forcing colleges to “reflect on some of their past practices.”

Cuomo, this source said, may be giving colleges the opportunity to say: “ ‘With the benefit of hindsight, we should have thought this through better, and we’ll do it differently in the future.’”

— Doug Lederman and Elizabeth Redden

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