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Cuomo's Plans for Loan Fines

June 22, 2009

For two years, ever since New York Attorney General Andrew M. Cuomo began hitting up lenders and colleges for six- and seven-figure payments to settle accusations that they had violated state laws with their student loan practices, his critics have wondered what he planned to do with the millions of dollars he's collected. Underpinning their questions has been skepticism -- especially as the months have turned to two years now -- about whether Cuomo would follow through on his promise to use the money (which, depending on how one counts, was at least $13.2 million) to help student loan borrowers.

Last month, New York State's Department of State published a notice announcing the availability of "up $13 million" in "student empowerment grants" for a pair of projects. The two grants will be awarded to (1) create a "Web-based, live-operator staffed student loan center" to help students and parents choose the best loan options and minimize loan debt, and (2) produce a campaign of public service announcements about financing a college education, with an emphasis on avoiding loan debt.

The grants, the attorney general's office said, are available only to nonprofit, charitable and government entities in New York State -- with one major exception. "Eligible organizations specifically DO NOT include institutions of higher education and their affiliates," the announcement noted.

Officials in Cuomo's office did not respond to a series of questions about the announcement and the attorney general's plans, including why colleges were excluded from the competition. But it was hard to read the statement as anything other than a signal that Cuomo did not want higher education institutions to benefit from a controversy for which he holds them significantly responsible. The attorney general's staff also did not respond to a question about whether student loan entities -- such as the state's student loan agency, the New York Higher Education Services Corp. -- were eligible to participate in the competitions, despite lenders' culpability in the controversy.

Cuomo collected the millions over a period of months in 2007, in the form of "contributions" -- he and the lenders and colleges being punished declined to call them fines or penalties -- by those who signed agreements to settle the attorney general's allegations that they had violated state consumer protection laws, through deals in which the colleges appeared to market lenders' products in exchange for something in return.

Looking back, some lenders and colleges say there was more smoke than fire in Cuomo's crackdown on student loans (and even more so in his subsequent inquiries into study abroad and other campus practices, which have not resulted in any announcements of findings of wrongdoing or similar settlements), but the fact is that as it was unfolding, his targets, one by one, coughed up money to his national fund to protect students. Columbia and Johns Hopkins Universities and Mercy College, and lenders such as Nelnet, Sallie Mae, Education Finance Partners, College Loan Corp., and the CIT Group all paid hefty sums into the fund, which the attorney general's office described as "dedicated to educating the country's high school students and their families about the financial aid process."

(A December 2007 news release from Cuomo's office, the last that describes the fund in detail, said it had collected $13.7 million from lenders and colleges, and said that a group of other institutions had distributed another $3.37 million to current and former students. But the attorney general subsequently reached agreements with other lenders that marketed their loans directly to students, and Nelnet said in September 2008 that it had paid an additional $200,000 to the attorney general's fund.)

Officials in the attorney general's office said Sunday that the $13 million available through the newly announced competition was all the money it had collected from the student loan settlements, which the request for proposals described as payments "by certain student loan lenders and marketers and certain institutions of higher education pursuant to agreements arising out of the OAG’s investigation of illegal and deceptive practices in the student loan industry."

The "Student Loan Center" created with the money, will "provide comprehensive information concerning how to minimize student loan debt, how to choose the best student loan options, and assistance for distressed borrowers," through "tools enabling students and parents to interact in real-time with staff trained to answer questions about financing higher education and repayment issues," such as "(a) an online calculator that permits students, graduates, and parents to calculate the overall cost of loan products based on interest rates, fees, and other relevant factors, (b) objective side-by-side loan product comparisons, and/or (c) objective ratings of loan products; and/or (2) an online 'reverse auction' that enables lenders to offer competitive bids for individual consumer’s loans."

The public service campaign, Cuomo's office wrote, "will use as spokespersons public figures, such as actors or musicians, who are popular among high school and college students. The PSA Campaign will provide information about how to minimize student loan debt and how to choose the best student loan options. The Campaign will also generate awareness of and interest in the Student Loan Center."

 

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