The First Dominoes Fall

If the private student loan industry has resembled the Wild West in recent years, as more than one commentator has suggested, multiple politicians are running for sheriff. But on Monday, New York Attorney General Andrew M. Cuomo became the first to put actual notches in his belt.

Cuomo announced at a news conference (at high noon, to boot) that facing the threat of legal action, several universities had signed settlement agreements obligating them to repay funds they had received from lenders and to abide by a "code of conduct" that will require them to give up or change certain aspects of their relationships with student loan companies. And one of the student loan industry's biggest players, Citibank, agreed that it too would abide by the code of conduct, and no longer offer to pay colleges a portion of their private loan volume to use for financial aid -- a practice Cuomo had derided as "kickbacks."

Under the agreements Cuomo announced Monday, Citibank agreed not only to abide by the code of conduct in all its dealings with colleges, but to create a $2 fund million fund, administered by the attorney general's office, to "educate college-bound students about the student loan industry."

And the following institutions agreed to repay to student borrowers money (a total of about $3.2 million) that lenders had paid them based on a portion of their loan business: Fordham ($13,840), Long Island ($2,435), New York ($1,394,563), St. John's ($80,553) and Syracuse Universities ($164,085), and the University of Pennsylvania ($1,617,580). St. Lawrence University and the State University of New York also agreed to sign the code of conduct, although the latter's institutions were not required to make any reimbursements or take other steps to comply with the attorney general's settlement agreement, because they had not engaged in the practices to which Cuomo objects.

“These schools and Citibank have made the responsible choice and are showing themselves to be industry leaders by being the first to take a major step in cleaning up a system laden with conflicts of interest,” Cuomo said. “We are beginning the process of restoring trust between universities and students and now is the time for other schools and lenders to step up and end the conflicts, perks and revenue sharing that have been costing students in New York and across the country dearly. These schools and Citibank are setting the example the entire industry should live by.”

As they have throughout the attorney general's investigation, consumer groups applauded the latest moves. “Consumers Union commends Attorney General Cuomo for moving swiftly to stop unfair practices, secure compensation for students and their families and improve public oversight,” said Chuck Bell, programs director for Consumers Union, which publishes Consumer Reports magazine. “With the skyrocketing costs of college tuition, students and parents need fair play and straight information from universities and lenders. This code of conduct will transform the lending process, result in more affordable loans for students and their families and should be viewed as a model for widespread adoption by schools and lenders across the nation.”

Even as the institutions struck their deals with Cuomo, some of them made clear that they had done so under duress. John Beckman, a spokesman for New York University, said in an interview Monday that the university had settled Cuomo's accusations that the university had failed to adequately disclose to students its revenue sharing agreement with Citibank because "it had no interest in further legal proceedings with the attorney general," and that from "a cost standpoint," the settlement made sense.

But reflecting the views of quite a lot of college administrators these days, Beckman said that NYU officials felt "great frustration" that the attorney general had besmirched the university's reputation and made its relationship with Citibank seem like something it should be ashamed of.

"We used what could be said to be the best practices in choosing a preferred lender," said Beckman. The university chose its private loan provider through a competitive process that Citibank clearly won by offering "the lowest rate for the greatest number of students," even those with poor credit scores. After the university chose Citibank, he said, the lender offered access to a program in which it agreed to pay the university 0.25 percent of its private loan volume for NYU to use for need-based financial aid for its students.

"It was a source of frustration to use that they could not see this particular set of facts the way we did," Beckman said, "and that they could not see that this other money is better used as financial aid for NYU than as Citibank profits."

Officials at Penn, which was also accused by the attorney general of failing to make its revenue sharing agreement sufficiently transparent, made a similar point in a statement posted on the university's Web site. Penn officials acknowledged that they had failed to disclose the arrangement clearly. But "[t]he CitiAssist program offered competitive rates and terms for our students at an interest rate equal to the prime rate or lower," said Craig R. Carnaroli, its executive vice president. Still, "[t]o avoid any appearance of impropriety, the university has decided to settle the matter."

Competition Among Lawmakers

The settlements announced Monday follow by three weeks Cuomo's announcement that his sweeping investigation into the student loan industry had uncovered "deceptive practices" and an "unholy alliance" between lenders and colleges, and by two weeks his statement that he planned to sue one student loan provider, Education Finance Partners, because it "aggressively offered schools cash kickbacks in exchange for business.”

Late last week, as Inside Higher Ed  reported Monday, the attorney general sent draft settlement agreements to some of the dozens of colleges from which he had earlier collected information about loan practices, and urged them to sign the accords to avoid being sued under New York State's consumer protection laws. He threatened to file such lawsuits, or at least issue subpoenas against perceived non-cooperators, as soon as today.

Some campus legal experts questioned whether Cuomo has the legal basis to pursue such lawsuits, because the state law provides a full exemption for practices that are legal under federal law, as the revenue sharing agreements are. And officials at some colleges outside New York said they were checking with officials in their own states about whether they are susceptible under state law in New York.

But it is also clear that colleges (and lenders) are feeling increasing pressure to reform their student loan practices -- pressure not only from Cuomo but from members of Congress and even the Education Department, which is contemplating changes in its rules governing colleges' relationships with lenders after several years in which the department was widely acknowledged to have done little to enforce the existing rules and the underlying federal laws.

With Sen. Edward M. Kennedy (D-Mass.) and Rep. George Miller (D-Calif.) (who respectively head the U.S. Senate and House education committees) pushing their own inquiries into the behavior of the student loan industry, there is suddenly an arms race in which politicians are competing to show that they are advocates for students and taxpayers. Kennedy's "Student Loan Sunshine Act" legislation  would do many of the same things at the national level that the Education Department has proposed doing in its rule making process -- and that Cuomo is trying to achieve, college by college and lender by lender, with his lawsuits and settlement agreements.

What's not clear is how many colleges and universities will seize the chance to respond to Cuomo's offer/threat, which came with intense pressure. In interviews in recent days, college officials, particularly those in New York, said they did not relish the idea of being at odds with the attorney general and saw the settlements as a potentially not-too-painful way to end practices with which they themselves had grown uncomfortable or that had, at least, come to be viewed negatively by many. This is particularly true of some of the more egregious instances, such as lender-paid trips to exotic destinations and lenders' staffing of financial aid offices.

But others still defend some of the practices that the attorney general has criticized as a group as "deceptive" or worse. As a senior official at one institution targeted by Cuomo said: "There are there reasons why the attorney general did this: politics, politics and politics. This was not about significant improvement in the way lending goes on; this was about maximization of press coverage and aggrandizement. You can't come to any other conclusion when you look at how universities were lumped together," regardless of the alleged wrongdoing for which they were cited.

Late Monday, the National Association of Student Financial Aid Administrators released a statement that said it understood why some colleges chose to settle, but that it would "stand by any postsecondary institution that decides otherwise and goes to court to adjudicate this matter. Schools that do not agree to this settlement care just as much about their student and parent borrowers and have as much integrity as the schools that agreed to the settlement." It added: "We believe the schools who challenge the Attorney General’s actions will prevail in any court case."

It will become clearer in the coming days how much movement Cuomo's campaign will generate, and how many institutions might call his bluff. Officials from the attorney general's office told some college leaders last week that the lawsuits and subpoenas could start flying as soon as today, and that Cuomo planned to make an example of some colleges. Stay tuned.