Aug. 10, 2007

Embrace Student Loan Reforms, Spellings Urges

Education Secretary Margaret Spellings took additional steps Thursday to try to combat the impression that her agency has been lax in its oversight of the student loan industry.

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In a conference call with reporters, Spellings announced that she had sent a letter to all colleges and universities, lenders and guarantee agencies that participate in the federal guaranteed student loan program, urging them to put in place the “principles” of new regulations the department proposed in June to govern the relationship between colleges and lenders and other aspects of the loan industry. Although the regulations are not set to take effect until next July, under the attenuated process for approving new federal rules, colleges ought to “act now” and “move with dispatch to take the steps necessary this upcoming year” to “adopt the principles embodied in the regulations,” Spellings said.

Among other things, the proposed rules the department released in June, which grew from a panel Spellings established last summer to consider new federal regulations, would require colleges’ lists of preferred lenders to contain at least three providers, and to bar from such lists any lender that has offered financial benefits in exchange for inclusion. The rules also require colleges to disclose the criteria they have used to select lenders on the list; make clear that borrowers have a right to select any lender they wish; prohibit lenders in the guaranteed loan program from offering payments, interest rate reductions, or other inducements to colleges in exchange for loan volume; and prohibit them from providing benefits, including conference attendance or transportation, to college officials.

Because the rules could change before they take effect July 1 — and, perhaps more importantly, because Congress is now debating Higher Education Act legislation that would make a set of roughly comparable (but not precisely consistent) changes in federal law — Spellings encouraged college leaders to adopt not the specific steps the department’s proposals suggest, but their overarching principles. Her letter described them as:

• To protect the borrower’s choice of lenders.
• To base lists of preferred, recommended, or suggested lenders, if provided by your institution, solely on the best interests of the student or parent borrowers, considering factors such as interest rates, fees, and loan benefits provided by the lender to the borrower.
• To not request or accept any payments or benefits of any kind from a lender in exchange for being included on a preferred or recommended lender list or in exchange for the school recommending the lender to its students or parents.
• To clearly and fully disclose to students and parents the criteria and process used to select the lenders for preferred, recommended, or suggested lender lists.
• To ensure that employees of lenders who make loans to students or their parents do not identify themselves as employees of the institution of higher education and that employees or agents of a lender, servicer, or guaranty agency do not work in or provide staffing to an institution’s financial aid office unless they do so at fair market value.
• To ensure that the institution’s employees will not receive any gift, including travel gifts, of more than nominal value from any lender, servicer, or guaranty agency.

Spellings’s letter offered a similar list of principles for lenders and guarantors to follow, beginning immediately.

“I urge you to act now to assure students and parents that we have their best interests at heart in providing competitive student loans,” Spellings wrote in her letter to college and lending officials.

The education secretary also announced that she would be convening today a panel of officials from several other federal agencies to discuss ways in which they might work together to bolster regulation and oversight of the private student loan market, where many of the abuses uncovered in the months-long investigations by New York Attorney General Andrew M. Cuomo and Congressional Democrats. Spellings said officials from agencies like the Treasury Department, the Federal Trade Commission, and the Federal Deposit Insurance Corporation would participate.

Spellings also mentioned — but declined to offer much in the way of additional details about — the department’s decision to examine more closely a sample of the more than 900 colleges where at least 80 percent of the federal student loan volume is held by one lender. Department officials announced at last month’s meeting of the National Association of Student Financial Aid Administrators that they had sent letters to all of those colleges, and an administrator at Middlebury College, one of those colleges, acknowledged this month that it was expecting a three-day visit from department investigators to look at its situation in-depth.

The secretary said the department was “sending teams” to some institutions to find out more about their arrangements with those lenders, but declined to say how many colleges the department was looking at.

Taken together, the various steps described by Spellings were clearly meant to show Cuomo, Congress and the public that the department is taking the problems in the loan programs seriously. Critics have repeatedly challenged that view, with House Democrats skewering Spellings at a hearing in May and a Government Accountability Office report citing shortcomings in the agency’s oversight last week.

Department officials have repeatedly argued that their powers to prevent the problems were limited by restrictions on their ability to regulate private loans and the high legal bar they must meet to show a quid pro quo in a lender’s offerings to a college or its officials.

— Doug Lederman

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