House to Act Fast on Student Loans

Bipartisan bill would ban lender gifts to colleges and service on advisory boards; U.S. student loan official quits.
May 9, 2007

The House of Representatives is expected to vote today on compromise legislation, drafted jointly by Democrats and Republicans, that would sharply increase regulation of the student loan industry and severely restrict the relationships between lenders and colleges.

Among other things, the legislation would bar all gifts from lenders to college officials, prohibit campus administrators from sitting on lender advisory boards and, for the first time, give the U.S. Education Department authority to regulate certain aspects of the private loan market, which has been characterized as the Wild West of the student loan world.

The measure incorporates aspects both of the Student Loan Sunshine Act (H.R. 890) put forward by Rep. George Miller of California and other Democrats, and of the Financial Aid Accountability and Transparency Act (H.R 1994) proposed by Rep. Howard P. (Buck) McKeon, the senior Republican on the Education and Labor Committee. The Democratic and Republican staffs of the Education and Labor Committee worked together on the draft legislation, which the full House could vote on as early as today under House rules aimed at speeding up consideration of legislation.

Committee aides said the leaders of the panel had decided to move ahead aggressively and move some legislation -- even if it does not accomplish everything they might wish -- because they felt Congress needed to act decisively, given the mounting concerns about the student loan industry.

"With college costs increasing, America's students and families are relying more than ever on student loans to help pay for a college degree," a one-page description of the bill says. "Yet ongoing investigations into the student loan industry have revealed that egregious conflicts of interest and corrupt practices among lenders, schools, and public officials are undermining the student loan programs that millions of borrowers have come to depend on. Congressional action is urgently needed to return these programs to their rightful owners: students and parents."

It is probably not a coincidence that House leaders are moving fast to pass legislation, and show that they are taking concrete steps to fix perceived problems in the loan industry, in advance of Thursday's hearing at which the Education and Labor Committee is calling Education Secretary Margaret Spellings on the carpet to explain what her department has done (and why it has not done more) on that front. Spellings herself moved Tuesday to show that she is taking action, announcing the resignation of Theresa S. Shaw, chief operating officer of the department's Federal Student Aid office, with three weeks' notice (more on that below).

The new legislation, which will keep the Student Loan Sunshine Act name, contains a wide mix of provisions aimed at ending potential conflicts of interest between lenders and college officials and requiring much more disclosure of information to would-be borrowers. Many of the provisions are similar to those contained in the "code of conduct" promulgated by New York's attorney general, Andrew M. Cuomo, whose own investigation has aligned with those pursued by Miller and Sen. Edward M. Kennedy (D-Mass.), who heads the parallel education panel in the Senate.

Among other things, the House legislation would:

  • Ban any "educational loan arrangement," which are defined as deals in which a lender pays a fee or other benefits to the institution. Many such arrangements occur now, and have increasingly been called into question, especially when they give colleges a share of the revenue based on loan volume.
  • Prohibit lenders from helping to staff campus financial aid offices.
  • Bar college officials from serving on lender advisory councils or providing any other formal advice.
  • Ban all gifts from lenders to campus officials and their families.
  • Continue to allow colleges to use lists of "preferred lenders," but require institutions to include at least three lenders on such lists, to explain how they chose the lenders, and to show that they put students' interests first in the selection of lenders.
  • Ban the use of "opportunity pools," which are loan funds that some lenders make available to institutions for their high-risk students in exchange for appearing on colleges' preferred lender lists. The pools have become controversial because critics say the students often aren't told they have other options, but defenders say they often go to low-income and minority students who have no other way to pay for college.
  • Call for civil penalties of up to $25,000 for colleges or nonfederal lenders found to have violated the provisions of the law, and for the suspension or termination of participation in federal loan programs for lenders who provide federal loans.
  • Require institutions to inform would-be borrowers of private loans about their options for receiving federally subsidized and insured loans.
  • Prohibit colleges from letting providers of private loans use their names, logos or other representations in promoting those loans.

Congressional aides and financial aid experts have been debating in recent weeks how much latitude the Education Department has to regulate the private student loan market; some Republican lawmakers have reportedly discouraged the federal government from getting involved. But while the legislation the House will take up as soon as today would stop far short of restricting the terms of private loans, as some advocates for consumers and students have advocated, it would make at least an initial foray into regulating such loans.

In other developments related to the burgeoning loan scandal Tuesday, the Education Department announced that Shaw would step down. Spellings said that Shaw had made the decision to leave in February, before the loan scandal intensified, and Shaw herself has not been directly implicated in any wrongdoing thus far.

But she is among the top department officials who formerly worked for Sallie Mae, at a time when the department is facing significant criticism for what critics say is its lax regulatory oversight of the student loan industry. Spellings praised Shaw in a note about her departure, which planned for June 1, and department officials insisted the change was unrelated to the loan scandal. But with Spellings under pressure to show that she is getting the department's house in order, the departure of Shaw is likely to be portrayed as proof that she is doing -- or trying to do -- something.

Said Kennedy in response: "The announcement of Terri Shaw’s departure has come during a time of crisis for our student loan system. A number of serious questions have been raised about Federal Student Aid’s ability to ensure the integrity of the student loan system, screen high-level employees for inappropriate entanglements with the lenders they oversee, and protect the privacy of students’ personal data from exploitation by lenders. Secretary Spellings must do all she can to assure Americans that the next director of Federal Student Aid will work aggressively to correct these problems and safeguard the best interests of students and families.”

Also Tuesday, Collegiate Funding Services, part of JPMorgan Chase, said that it would end relationships with more than 100 alumni associations in which the groups receive a share of revenue from the lender for all consolidated loans that they help market to their members. Cuomo took aim at similar arrangements between another lender, the National Education Loan Network, and alumni associations last week, and JPMorgan said it was ending its relationships as part of the agreement it reached with Cuomo in April.


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