Cuomo's Smoking Gun

On Wednesday, the other shoe dropped in a growing investigation of colleges' ties to the lenders they recommend to their students -- and many experts on the loan programs were stunned by the developments.

Administrators at Columbia University, the University of Texas at Austin and the University of Southern California were reported to have owned stock in a lender that they placed on their "preferred" list for students. Andrew M. Cuomo, New York State's attorney general, sent a subpoena to Columbia Wednesday and letters to the other institutions, seeking details. The colleges involved are not disputing the stock ownership, which was reported in public filings.

"We are seeing more and more suspicious practices and dealings between university officers and loan companies come to light," said a spokesman for Cuomo. "This creates even more questions about the integrity of the student loan industry and the process by which colleges steer students to loans."

The issue of university officials' stock ownership is a dramatic shift in the investigation. To date, Cuomo has focused on funds colleges have received from lenders placed on "preferred" lists. While Cuomo has called the funds "kickbacks," and many colleges have now agreed to repay the funds and stop taking such payments in the future, many aid experts defended the arrangements, noting that the funds were used for need-based financial aid for students.

In contrast, the arrangements that came to light Wednesday involved university administrators personally holding stock in a loan company and apparently doing well with their stock sales.

Terry W. Hartle, senior vice president for government and public affairs at the American Council on Education, said that the payments that were the initial focus of Cuomo's investigation "could have been defended" by colleges and that there were "two sides to that story." But assuming the facts are correct about the stock ownership, Hartle said that "this is inexcusable and indefensible."

Hartle added: "I am terribly surprised. Student financial aid administrators as a group have the utmost integrity and care enormously about serving the students who attend their institutions. I'm surprised and saddened to learn that this sort of behavior may be occurring at any institutions." He urged college presidents and lawyers to "look very carefully" at any and all relationships between their institutions and lenders, applying the test of whether these ties would look acceptable if in broad public view.

The stock in question was from Education Lending Group, the parent company of Student Loan Xpress. Stock was held by David Charlow, executive director of financial aid and senior associate dean of student affairs at Columbia; Lawrence Burt, associate vice president for student financial services at Texas; and Catherine Thomas, associate dean of financial aid at Southern California.

Wednesday's revelations were triggered by an investigation by the New America Foundation, which has been critical of lender-college ties and which posted details and some of the relevant documents online. The foundation noted that the stock held by the three officials was apparently worth more than $100,000 when it was sold. The foundation also noted personal endorsements of the company made by Charlow to students. "Students going to their financial aid office think they’re getting advice from an impartial, informed intermediary. We’re finding that advice isn’t always impartial and it isn’t always fully informed," said the foundation's blog on higher education. (In the spirit of full disclosure, the foundation report was prepared by Stephen Burd, a former colleague of this writer.)

While officials at their universities fielded questions for the three financial aid officers Monday, Burt told the foundation that the stock did not influence his decisions at Texas. (Officials of the Education Lending Group did not respond to phone calls or e-mail.)

A statement from Columbia did not name either Charlow or the foundation, but said that the university had recently learned that a financial administrator "had a financial interest in one of our preferred lenders." Columbia said: "We promptly began an investigation, placed the officer on leave pending a full review and notified the attorney general." The statement from Columbia, and similar statements from the other two universities, promised to study Cuomo's requests and to respond accordingly.

People familiar with the investigation by Cuomo said that it was not clear under what circumstances the officials received the stock. A Texas spokesman said Burt had said that he paid for it. But others familiar with the investigation said that the records suggested that the university officials -- who were members of an advisory board for the lender -- received stock options in return for their service. In many stock option arrangements, the stock is purchased, but under terms quite favorable to the purchaser. The New America Foundation reported that some advisory board members did not accept these stock options.

Columbia declined to answer any questions or to provide a copy of its code of ethics for employees. The Texas and Southern California policies both contain statements that might be relevant. Southern California's ethics code notes the importance of avoiding both real conflicts and anything that could be perceived as a conflict. The code specifically states that a conflict could be created by "maintaining an external consulting or other business or employment relationship (including all arrangements in which you are compensated in any way) with a supplier, vendor or competitor of the university, which a reasonable person would expect to impair, or which appear to impair, your independence of judgment in the performance of your university duties."

The University of Texas System's policy states: "It is the policy of the State of Texas and The University of Texas System that employees may not have a direct or indirect interest, financial or otherwise, in a corporation or business, engage in a professional activity, or incur an obligation of any nature that is in substantial conflict with or might reasonably tend to influence the discharge of the employee’s official duties.

The National Association of Student Financial Aid Administrators, which has been critical of the Cuomo investigation, accusing the attorney general of hurting the reputations of aid officers, issued a statement Wednesday night saying that the group "believes it would be inappropriate for a school to place a lender on a preferred lender list in exchange for shares of stock."

However, the statement went on to say the following: "We would also note that if the financial aid administrator purchased the stock with their own funds, their ownership of the shares may not be evidence of improper conduct, but would certainly present the appearance of a conflict of interest. NASFAA advises its members to perform their functions with the interests of students as their foremost priority and believes that any activity that conflicts with that priority represents a questionable practice."

Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers, said he was "amazed" by Wednesday's reports. "I sincerely hope that there has been a mistake because these are very prominent colleagues with distinguished careers in higher education," he said.

Assuming the reports are correct, Nassirian said that they raised questions not only about these colleges' policies but about oversight of the student loan system in general. "The idea that campus officials could own stock in companies that they put on preferred lender lists certainly strikes me as unseemly, even though I suspect it is perfectly legal in view of the [Bush] administration's refusal to meaningfully regulate the student loan industry," Nassirian said. "That abdication of responsibility and the vast amounts of windfall profits at stake have created a student loan system that is rigged to put the interests of the borrowers last."

JJ Hermes, editor in chief of

the student newspaper at Austin, said he thought students would find it "outrageous" that they had been encouraged to use a lender in which a university official had held stock. Hermes praised the investigations as "really beneficial" and said he hoped they would lead to conflicts being eliminated and to students being informed of any conflicts that exist.

"It seems to me like these companies are pretty ravenous when they want a foot in the door," Hermes said, so universities need to be doing everything they can to protect students. For some university officials to have held stock in such companies "sounds like payola," he said.