Another Lender Relationship Questioned

Until now, the evolving controversy surrounding the federal student loan programs has focused mostly on the relationships between lenders and colleges and between lenders and federal officials. But now state guarantee agencies are being drawn into the fray, with Friday's announcements that Sen. Edward M. Kennedy and New Jersey's attorney general were investigating arrangements in which two lenders paid that state's student loan guarantor millions of dollars for loans that the agency helped direct the lenders' way.

Kennedy's office released documents Friday showing that the New Jersey Higher Education Student Assistance Authority, one of 23 state-based agencies that guarantee loans provided by private lenders in the Family Federal Education Loan Program and provide a range of other services to colleges and students, had arrangements with Sallie Mae and the National Education Loan Network in which it received a cut (1.4 percent and 1 percent, respectively) of the volume of each loan referred to the lenders by the state agency.

The agreements, which the state agency ended on April 20 as scrutiny of the arrangements grew, has since 2000 brought the state agency $2.2 million a year from Sallie Mae and a lesser amount from Nelnet, according to The Star-Ledger of Newark, which first reported on the arrangements last week.

Kennedy and officials in the New Jersey Attorney General's office said they would investigate whether the incentives paid to the state guarantor led it, or the colleges with which it works, to direct student borrowers to Sallie Mae and Nelnet rather than to other lenders from whom they might have received lower rates or better benefits.

The underlying implication of the entire student loan controversy to date has been that students are being hurt by being forced to pay more for their loans, although the lawmakers -- members of Congress and attorneys general in various states, notably New York -- have produced little evidence along those lines to date, focusing instead on revealing the relationships and questionable arrangements.

“The law established guaranty agencies to be impartial and unbiased guardians of student interests, overseeing the conduct of private lenders in the federally guaranteed loan program," Kennedy said in a news release Friday. "Contracts like these present a serious conflict of interest and compromise the agencies’ neutrality. We cannot allow guaranty agencies to become marketing departments for large for-profit lenders."

New Jersey's first assistant attorney general, Anne Milgram, who is heading the state's investigation, told the Star-Ledger that her office was looking into whether the state guarantor "offered inappropriate inducements or sought to inappropriately influence schools to provide specific loans and to work in conjunction with HESAA." (New Jersey's attorney general announced Friday that it would undertake a broad review, including subpoenas to 60-odd colleges, into lender-college relationships, prompted by Kennedy's inquiry and that of Andrew M. Cuomo, the attorney general in neighboring New York.)

Officials at some New Jersey colleges told that the newspaper they had felt pressure from the state agency, first to participate in the FFEL program (also known as the guaranteed loan program) rather than the government's competing direct loan program, and to send their students to Sallie Mae.

"All the public institutions were proactively encouraged to get into the (FFELP) and use Sallie Mae as the preferred lender," Anne Frechette, a spokeswoman for Montclair State University, told The Star-Ledger.

David Muha, a spokesman for Drew University, said in an interview Sunday that the state agency had approached his institution in 2000 about participating in a pilot program in which loans handled through Sallie Mae would receive expedited processing and would be handled by a single loan officer, ensuring better customer service. In addition, HESAA promised to put one of its own officials in Drew's financial aid office to help process loans. The promise of top-quality customer service sold Drew officials, Muha said; no mention was made, then or since, about the fact that the agency would receive funds for loans that went Sallie Mae's way.

"From our perspective, it was all about the service," Muha said. "Drew had no knowledge that there was any kind of backend agreement going on, and there was really no reason for Drew or any other university to question the motives of a state agency set up to serve students going to school in New Jersey."

For the last seven years, until last fall, when a new financial aid officer took over, the HESAA loan program was alone on Drew's preferred lender list, a practice that has become increasingly frowned on in the current climate of increased scrutiny of lender-college relationships. Last fall, the institution added two other firms, both of which have their loans processed by Sallie Mae, Muha said.

Data provided by Studentmarket Measure, which collects information on the student loan programs, suggests that Sallie Mae has become the dominant lender -- in some cases, virtually the sole lender -- at numerous public and private colleges in New Jersey, as seen in the table below:

Proportion of Loan Volume Originated by Sallie Mae at Selected N.J. Colleges

Source: Studentmarket Measure

Officials at New Jersey's Higher Education Student Assistance Authority could not be reached for comment Friday or over the weekend. But its executive director, E. Michael Angulo, told The Star-Ledger that the agency will cooperate with Rabner's probe. "Our immediate objective is to develop 'best practices' guidelines that reflect the highest ethical standards and codes of conduct in the industry." (On a side note: the agency's chief financial officer, Gene Hutchins, was a member of the Education Department committee that has been negotiating possible changes in federal regulations governing the student loan programs. Among the topics that panel has been discussing are the sorts of inducements that are at issue here.)

A spokesman for Sallie Mae, Tom Joyce, said via e-mail on Sunday that its agreement with the New Jersey agency had gone through normal state procurement procedures, and noted that the arrangement was "non-exclusive.... The agency was free to work with other lenders, and did so." Colleges in New Jersey, and their students, Joyce said, "were also free to work with any lenders they chose."

He also said it was Sallie Mae's understanding that "the agency used the proceeds to help defray the 1 percent federal default fee charged to students by the federal government," adding: "Simply put, the result of this agreement was that student loans cost less for New Jersey's college students."

Joyce said, in response to a reporter's question, that Sallie Mae has not had any similar arrangements with other state guarantors.

Also on Friday, U.S. Rep. George Miller (D-Calif.), who along with Cuomo and Kennedy has been the leading the three-ring investigation into the loan industry, announced Friday that the U.S. Education Department's inspector general had begun an investigation into allegations that department officials who oversee the loan programs may have had conflicts of interest because of their relationships with lenders. Miller had requested such an investigation last month.