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Loan Scandal Escalates

April 10, 2007

When Andrew M. Cuomo started asking questions about the relationships between lenders and colleges, many in higher education scoffed (off the record) that this was a case of an ambitious politician looking for headlines and that there wasn't much for his inquiry to find. There's no doubt that Cuomo, New York State's new attorney general, is an ambitious politician looking for headlines, but he's finding more and more to investigate. And some experts on aid are increasingly worried that the scandal is going to scare some students and families away from borrowing or from getting advice from financial aid offices.

On Monday morning, CIT -- which in 2005 bought Student Loan Xpress, the lender at the center of much of the scrutiny -- announced that the CEO, president and vice chairman of that division had all been placed on leave. Johns Hopkins, Widener and Capella Universities also found themselves facing new scrutiny Monday.

On Monday afternoon, Johns Hopkins University announced that CIT had informed it that the financial aid director at Hopkins, Ellen Frishberg, had been paid $65,000 in consulting fees (some of which helped finance her doctoral program) and $1,200 in travel expenses since 2002. Hopkins said that it was placing Frishberg on administrative leave, pending an investigation. Student Loan Xpress is among the lenders Hopkins has recommended to students for certain private (non-federal) loans.

Like several others who have been caught up in the scandal, Frishberg is a national leader in the financial aid world, seen as an advocate for students. She is an alternate on the special panel negotiating new rules for loan programs with the U.S. Education Department, and has been participating in those sensitive discussions.

Last week, Education Secretary Margaret Spellings asked for the resignation of Lawrence Burt -- now on leave from the top financial aid post at the University of Texas at Austin -- from the Advisory Committee on Student Financial Assistance because of his involvement with Student Loan Xpress. A department spokeswoman said  officials were looking into the situation with Frishberg.

Also Monday, officials at Widener University, in Pennsylvania, confirmed that they have been asked by Cuomo about the relationship between that institution's financial aid director, Walter C. Cathie, and Student Loan Xpress. The lender has reportedly paid tens of thousands of dollars to a consulting company Cathie runs. Cathie could not be reached for comment Monday evening.

At a time that Cuomo and members of Congress are questioning whether college officials have become too cozy with lenders, Cathie's consulting company may not reflect the image higher education wants to put forward. Cathie's biography identifies him as the founder and senior partner of Key West Higher Education Associates, which "sponsors invitational conferences on institutional loan origination processes and procedures."

Key West is currently promoting a conference for aid officers featuring speeches by Mike Shaut, the CEO placed on leave Monday at Student Loan Xpress, and Dick Willey, the CEO of the Pennsylvania Higher Education Assistance Authority, a state loan agency facing reforms and much criticism after reports of spending on resort hotels, cigars and pedicures, among other expenses. (Despite the materials listing Willey, a spokesman for his agency said that he had not been asked to speak at the conference and would not do so if asked.)

Among the topics planned for the seminar: "lingering concerns over improper inducements" for participation in loan programs and "how to protect your institution."

A spokeswoman for Capella University, Irene Silber, confirmed Monday that her institution -- an online for-profit -- had received an information request from Cuomo.

Silber said that Tim Lehmann, director of financial aid at Capella, had received $12,400 from Student Loan Xpress in 2006 for consulting work, helping the company find better ways of working with online students. Capella includes Student Loan Xpress on its list of recommended lenders to students, but Silber said it has done so since before Lehmann arrived at the university in 2001, and that Lehmann "was not responsible for putting it on our list."

Capella is cooperating with Cuomo's investigation, Silber said. Asked about Lehmann running its financial aid office while being paid by a lender, Silber said, "I don't know if it raises concerns" for the university.

As the loan scandal has grown in the last two weeks, more and more institutions have become involved.

Cuomo started off with a series of information requests and then agreements with colleges to stop taking payments from lenders based on the business the companies gained from being on recommended lender lists maintained by the colleges. Many of the colleges also agreed to repay these funds, which Cuomo called "kickbacks," but many colleges defended as a means of obtaining funds for student aid. Many of those agreements were with Education Finance Partners, whose CEO is also scheduled to appear at the Key West conference on protecting institutions from questions about inducements.

Last week, helped by reporting on the New America Foundation's Web site, Cuomo was pointing to stock held and sold by three financial aid officers -- at Columbia University, the University of Texas at Austin, and the University of Southern California -- all of whom have now been placed on leave.

Times are so tense in the lending industry that even its lobbying arm -- normally quick to defend members -- wouldn't discuss any of the developments in detail on Monday.

"We don't have the facts regarding current investigations of student loan marketing practices and don't feel it is appropriate for us to comment," said Fritz Elmendorf, vice president for communications of the Consumer Bankers Association, in a statement. "CBA member banks have spent substantial time and resources to ensure compliance with the Department of Education's regulations on inducements. We welcome the promulgation of a clear, universally applied set of standards to ensure integrity in the marketplace, and such standards should not create obstacles for lenders communicating with their student or school customers."

Fallout for Students and Families

Many experts on student aid are worried about the fallout from the scandal on students and families -- even while expecting that few students will understand the details.

Laura W. Perna, an associate professor of higher education at the University of Pennsylvania who studies enrollment patterns of low-income students, said that she didn't think the complexities of federal loan regulations would be grasped by many students and their families. But she said that didn't mean there's not a real problem now.

"Especially with all the high profile institutions involved, people are going to hear the sound bites," she said. (Penn is among the institutions that agreed to pay back funds, although its involvement in the loan furor hasn't involved allegations of personal gain by aid officers; Perna's role at Penn is as a scholar, not an aid administrator.)

The problem for colleges, Perna said, is that this scandal isn't happening in a vacuum. "We already have public skepticism over rising costs and accountability," she said. "Scandals like this certainly don't help the credibility of higher education."

Of particular concern, she said, is the impact on low-income students. Many studies have shown that there is "already a hesitancy to borrow" among low income, minority students -- students colleges very much want to attract -- and headlines about loan scandals are "going to contribute to the difficulties there," she said. And this is the case even though many low-income students have good loan options available and can gain from taking advantage of them to get a college education, she said, because "many students really do need to borrow."

What should colleges do? "I think colleges and universities have to be especially careful right now that their hands are clean," Perna said

Robert Weinerman, director for college financing at College Coach, said that there is already evidence that the scandal is having an impact. College Coach provides advice on admissions and financial aid to company employees (where businesses provide the services as an employee benefit), and Weinerman said that there are already questions coming in from employers about what the scandal means, and that these questions are likely prompted by employees who are looking at paying for college for their children.

Weinerman, who formerly worked in financial aid at the Massachusetts Institute of Technology and Babson College, also said context was important in looking at the impact. The part of the financial aid process under the most scrutiny involves private loans that students receive on top of the much more prominent federal loan programs. More and more families are finding it necessary to take out private loans, but they typically get little help from colleges in understanding their options besides the "preferred lender" lists that are now being questioned.

"This is a huge black box for families," Weinerman said. "They get very little support."

And that's why Weinerman is worried right now for students. "This is a part of the process that is very difficult for families and they rely significantly on the preferred lender lists because the assumption is that the college has vetted the lenders," he said. "It's difficult for families to comparison shop, so they assume the colleges have."

While Weinerman said that he suspected the problems aren't widespread, he's not sure that will matter. "This could take away the financial aid office as a reliable source for people," he said. "People may end up in the hands of less scrupulous lenders because all those ethical aid officers are going to be less trusted" with their preferred lender lists, he said. "There is so much publicity -- everyone is going to be suspect."

Robert Shireman, founder of the Project on Student Debt, said he hoped that the scandal would lead to some good. "All of these revelations put financial aid administrators on notice that they have to be very cautious about the financial relationships that they develop with lenders and for the long term good of financial aid, I think that is a positive because it means that there will be cleaner and clearer lines between the advice students are getting and the funding that colleges are getting."

While colleges have defended some of the relationships -- especially those in which money was used for financial aid -- Shireman said colleges should bar all payments from lenders going to aid offices or the people who work there. "I think kickbacks to individuals or to universities create conflicts of interest that raise questions about the advice that colleges and financial aid administrators are giving to students," he said. "I understand how tempting it has been, especially when you see others doing it, and maybe you already have some business relationships and it feels like 'why not,' but that creates the slippery slope."

 

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