A 'Systemic' Scandal

As the student loan scandal has unfolded in recent months, college financial aid officers and their advocates have repeatedly dismissed the hysteria as a case of a few bad apples in an ethical orchard. But a report released Thursday by Senator Edward M. Kennedy’s (D.-Mass.) office churns some cider out of that argument, naming a large number of colleges that have accepted or even solicited inducements from lenders -- often offered with the expectation or explicit agreement that the institution would grant said lender preferential treatment.

“Given the breadth of the evidence presented in this report it is clear that the problem is systemic and cannot be isolated to a few ‘problem’ lenders or schools," the report says.

The "Report on Marketing Practices in the Federal Family Education Loan Program" goes so far as to suggest that colleges are regularly accepting inducements provided in violation of federal law (although a lawyer for the national association of financial aid officers, Sheldon E. Steinbach, said that nothing that's turned up so far seems to be clearly illegal).

"[M]any lenders in the FFEL program," the report says, "routinely engage in marketing practices that violate the letter and spirit of the inducement prohibition of the Higher Education Act” – which, the report also notes, bars not only “a consummated quid pro quo deal, but the mere offer of such a deal."

"Schools and financial aid offices often solicit, and lenders provide, various types of in-kind compensation -- compensation that could otherwise be used to reduce students' loan burden," the report says. It adds that while, "[i]n many cases, these ‘favors’ are not solicited by financial aid offices and have no apparent impact on the advice that financial aid officers provide … [g]iven the crucial ‘gatekeeper’ role played by financial aid officials, solicitation of any benefit not explicitly permitted by existing law creates an appearance of conflict of interest, undermines students’ trust in the process, and magnifies the risk of illegal quid pro quo deals.”

The Kennedy report does document some of the more egregious and well-known alleged conflicts of interest at places like Columbia University, Johns Hopkins University, the University of Southern California and the University of Texas at Austin -- at the latter, the report notes, for example, the "office and its leadership prioritized lender treats over competitive pricing and borrower benefits in deciding which lenders would be at the ‘top of the preferred lender list,’ and only allowed lenders access to the top of the list if they provided certain extraordinary personal benefits to the [UT Austin] director and his staff" (including staff happy hours, lunch “and/or” dinner with the former director, Lawrence Burt, parties for Burt’s family and “tequila and wine”).

But beyond such an extraordinary example of a university soliciting inducements, the report considers all sizes of solicitations -- everything from the University of Puget Sound requesting “pens, pencils, note pads, magnetic clips or post-it notes” from NorthStar to include in a care package for a business officers' meeting, to Chaminade University allegedly asking Citibank to host eight receptions for admitted students, at a cost of $2,000 apiece, in exchange for business.

The report includes spreadsheets illustrating the scope of lenders’ marketing expenses, some in the several hundred dollar range but others worth thousands.

To give just a few examples: Chase spent $468 on golf towels for Florida Junior Community College, $1,174 for 405 foldable wallets for Ursuline College and $3,239 on printing costs for DeSales University’s marketing portfolio. Bank of America spent $5,000 to sponsor a Temple University golf tournament, $21,242 to sponsor two University of California at Los Angeles “Regents Scholarship Receptions,” and $300 for a catered lunch at Arkansas State University’s financial aid office. U.S. Bancorp spent $15,000 for direct access marketing to incoming students at Washington State University, College Loan Corporation paid $494 for dinner at a conference with “key target schools,” and NorthStar $450 for “global stress yo-yos” for the Medical College of Ohio.

Beyond that, the report outlines how “lenders routinely offer, and schools solicit” what the report calls “sweeteners,” and what industry calls “value-added services.” For instance, internal documents suggest that lenders offer banking services to colleges as part of a strategy to increase their market share (including, specifically, at historically black colleges and universities), and they “routinely” pay for printed materials, with the Bank of America for instance spending $8,777 for a print job at Mansfield University in December.

At colleges that outsource exit counseling for student borrowers to lenders, the report finds that “lenders frequently use this opportunity to market loan products to students rather than offering unbiased financial advice as the statute and regulations prescribe.” And, on a related note, the report details in great depth the compensation for financial aid directors chosen for loan company advisory boards -- who are often selected, the report argues citing internal loan company documents, based “at least in part, on factors having nothing do with their expertise but everything to do with business opportunity.”

Again, just a sampling of some of the costs paid by lenders to host advisory board meetings, billed as opportunities for professionals to, of course, advise the industry on practices: According to the report, Citizens Bank spent about $43,000 in 2005 for a three-day meeting in Phoenix, including more than $15,000 on food and $1,500 in spa treatments, Chase spent almost $18,000 on food and beverage alone during a three-day meeting in San Diego in October, while Nelnet even offered to make donations to an advisory council participant's alma mater or college of choice. The report also details some consulting fees collected by individual financial aid officers, listing for instance thousands of dollars in fees and reimbursed expenses paid by JPMorgan Chase.

A spokeswoman for the National Association of Student Financial Aid Administrators -- which, while having backed off a bit from its initial harsh rhetoric criticizing the various federal and state loan investigations, has still generally stuck by its argument that the problems are limited in scope -- said that only the president, Dallas Martin, could speak to the report and that he would not be available until next week.

Steinbach, the lawyer who represents the association in its dealings with New York Attorney General Andrew Cuomo (who has led his own national investigation into lending practices), reiterated the “rotten apples in a barrel” argument Thursday. A college that accepted several thousand dollars from a lender for a golf tournament, for example, was acting in a culture where that seemed “perfectly acceptable,” Steinbach said. “Now there isn’t a school in the country that I know of that would accept that kind of gift.”

“It was acceptable at the time,” Steinbach stressed. “The senator has made tremendous impact on the student loan community and colleges and universities and has dramatically altered the moral and ethical standards -- along with Attorney General Cuomo -- in which gifts and other benefits that were provided to institutions will no longer be accepted in any way, shape or form.”

While not all of the institutions named in the Kennedy report could be reached, a couple of the colleges contacted Thursday took issue with how they were represented in the report. For instance, the report describes a 2005 letter from Texas Tech University to its already selected preferred lenders indicating that the cost to be listed as a preferred lender on the financial aid Web site would be $500 ("Please allow this letter to serve as an invoice").

In a statement Thursday, Texas Tech described the $500 fee as an optional cost for lenders to advertise with a logo on the Web site. “No advertising impacts the ranking of the lenders,” the university said in a statement. “Any lender that opted out of the advertising opportunity was still listed … on Texas Tech’s lender list without a company logo.”

The report from Kennedy, chairman of the Senate Committee on Health, Education, Labor and Pensions, also implies, at least, that Duquesne University accepted free legal services from PNC Bank, although a spokeswoman, Bridget Fare, said that the institution had rejected the bank's offer.

Others contacted said the report, and its many examples of alleged wrongdoing, was indicative of a need to clarify appropriate activities.

“In general, the university is supportive of the work of this committee, as well as the work of a lot of others who are involved in reviewing current practices around lending activity and who are being thoughtful about how to implement reform," Sherry Mondou, vice president for finance and administration at the University of Puget Sound (cited in the report for the post-it request), said Thursday. “I do think clarification, conversation around these issues is going to be helpful to a lot of very well-intended financial aid professionals who I think are working for the benefit of students and wanting to do their work with a great deal of integrity."

"Chairman Kennedy's report underscores the urgency in Congress [of] passing legislation that will increase transparency and clarity in the federal student loan program,” added Kevin Bruns, executive director of America’s Student Loan Providers, in an e-mail. “It's important that Congress and the stakeholders work together to pass a bill that both protects the interests of borrowers and strengthens the public's trust in the financial aid system.”

Also on the always busy student loan front Thursday, Cuomo announced a $1.125 million settlement with Johns Hopkins University, a result of Cuomo’s findings that the university’s former financial aid director, Ellen Frishberg, promoted Student Loan XPress after receiving more than $65,000 in consulting fees and tuition payments. Johns Hopkins agreed to abide by Cuomo’s code of conduct, though indicating in a statement that, under the terms of the agreement, the university explicitly denied violating New York law.