Cuomo Targets Fire Back

As business officers assess impact of the loan scandal, Clemson and Drexel officials question attorney general's tactics and conclusions.
August 1, 2007

Voices of defiance have been few and far between as the student loan inquiry rumbled through higher education in recent months. But as the annual meeting of the National Association of College and University Business Officers came to a close Tuesday, a "town hall meeting" on student loans showcased the stories of two institutions that fought New York Attorney General Andrew M. Cuomo -- one that ultimately folded, and another that is still fighting, at least rhetorically.

It's not that the dozens of college officials who spoke or listened embraced or defended some of the more egregious practices that Cuomo's investigation uncovered, particularly those involving personal profit for individual financial aid officers. And most of the business officers seemed to accept the premise that the student loan scandal will ultimately prove to have been a helpful, if bitterly painful, wakeup call for higher education institutions that may have been lax in guarding against individual and institutional conflicts of interest.

But the overriding themes of Tuesday's session were that the student loan investigation has unfairly tarred higher education institutions and their officials for engaging in practices designed to help, not hurt students, and that Cuomo sometimes overreached in his accusations and legal theorizing. Those are sentiments that are commonly shared around water coolers and over beers but rarely in public as they were Tuesday, with a representative of Cuomo's office in the audience, no less.

(In a related matter, Cuomo announced Tuesday that he had reached a settlement in which the National Education Loan Network, or Nelnet, would pay $2 million to the attorney general's education fund and cease its arrangements with nearly 120 alumni associations in which it had exclusive rights to consolidate the loans of their members.)

The defiance at Tuesday's NACUBO session came in two degrees of intensity. Thomas Elzey's was, by necessity, watered down. Drexel University, where Elzey is senior vice president, chief financial officer and treasuer, had the most visible and direct conflict with Cuomo's office. When the attorney general challenged Drexel's arrangement with Education Finance Partners, in which the university received about $125,000 a year in revenue based on a share of private loans its students borrowed from the lender and used the proceeds for need-based aid for other students, Drexel decided to fight.

"We didn't think we were doing anything wrong," Elzey said Tuesday, describing the arrangement as a "win-win" that directed "all those resources back to students." Not only had the university chosen Education Finance through a competitive bidding process in which it made the best proposal, he said, but Drexel had disclosed to student borrowers that the university was "receiving some benefit" from the lender as part of the deal. (Cuomo asserted otherwise in his news release announcing the settlement, saying that "Drexel did not disclose this information to its students or their families.") Critics who felt that Cuomo's office had been bullying colleges and maligning financial aid officers with sweeping generalizations about ethical lapses cheered Drexel for standing up to him.

But as instances of individual wrongdoing at other colleges mounted and "the whole story became a snowball rolling down a hill," Elzey said Tuesday, Drexel officials changed their minds and decided to settle. They agreed in April to refund the money the university had received from Education Finance to student borrowers whose loans, Cuomo argued, had cost them more than they might have if Drexel had negotiated a lower interest rate for them, rather than sharing in a portion of the loan profits. "When it all was said and done, we didn't want to see the name Drexel University dragged through the mud," Elzey said.

Having signed the settlement agreement, which Elzey said limits Drexel's ability to comment on the outcome of the investigation, Elzey said he felt obliged to offer what he called a "sanitized presentation" at the NACUBO meeting. "Some universities were unfairly treated in this process. That's all I'm going to say," Elzey said. (Whether the Cuomo settlements impose a "gag order" on college officials, as one participant in Tuesday's session suggested, is disputable. Most of the settlement agreements preclude colleges from sharing information about "any nonpublic aspect" of the investigation, though they say that colleges can issue "public statements.")

The Case of Clemson

If Drexel's defiance was watered down, like decaf coffee from a highway rest stop, think of Clemson University's as a double espresso. Strolling the stage and speaking in a Southern drawl, Clemson's general counsel, Clay Steadman, spun a tale of the South Carolina institution's encounter with Cuomo. It began with the innocuous request for information about its practices that came in February and built to a late-night telephone call in late March in which a Cuomo aide urged Clemson officials to sign (within 48 hours) an agreement in which it consented to abandon its own revenue sharing arrangement with Education Finance Partners, which was awarded through South Carolina's competitive bidding process. Clemson was among the dozen colleges Cuomo cited in his March 22 news release in which he threatened to sue Education Finance.)

Steadman had several problems with the proposed agreement, he told the attorney general's aide. First, Clemson officials were confident that Cuomo had no jurisdiction to bring a legal claim in South Carolina. Second, Steadman said, he was troubled by language implying that Clemson had accepted "kickbacks," among other things. And third, he expressed concern that he was being asked to sign a "draft" agreement, and was jarred when the Cuomo official responded that the office wanted Steadman to sign the agreement draft "but we might change it later."

"It was at this point in the conversation where the phrase 'go to hell' started to appear," Steadman said, explaining that, "as some of you may know, we don't have a great tradition of reacting well to threats of aggression, particularly from Northern states."

Acknowledging with only a little bit of sheepishness that his reaction "may have been an appropriate sentiment, but it's not really a fundamentally sound legal theory," Steadman said that he called Cuomo's office the next day and informed its officials that he and South Carolina's attorney general would conduct an investigation of their own into the Education Finance-Clemson relationship.

That review found "no violation, legal or ethical," although Steadman noted that it prompted Clemson to strengthen its disclosure to students about the deal. Since then, Steadman said, Clemson has ended its arrangements with Education Finance and another lender, the National Education Loan Network, "not because it violated the law, but because it seemed to be becoming a best practice in industry" not to have such arrangements.

When informed that South Carolina's own investigation had cleared Clemson, Cuomo's office told Steadman that "in light of that, we were no longer an active target of their investigation.... That is something less than I would have liked," he said, suggesting that an apology would have been in order given that Cuomo made "statements to the public and the press ... insinuating that we engaged in unethical practices, which was not true."

A lawyer for Cuomo's office shifted somewhat uncomfortably in her seat, but did not speak, as those sorts of barbs flew the attorney general's way. (She said after the event that she could not comment on it.)

But even in expressing regret that "the innocent do get splattered with the mud" in inquiries like Cuomo's, as Marcus F. Buckley, vice president for finance and administration at New York's College of Saint Rose, put it, he quickly added that "it is also important to remember that "some of us out there lost our moral compass." Buckley encouraged his colleagues to view the student loan scandal as a "warning shot to all of us to make sure all of our respective houses are in order," not just in financial aid but in all interactions in which colleges and universities are intermediaries, in one fashion or another, between businesses and students.

Another official expressed concern that applying the same principles Cuomo used to judge student loan arrangements to other situations "where we get significant revenues returned to our schools that are used to support our indirect costs or other services" could result in revelations that are "just as embarrassing, even though we're doing what we should be doing" -- finding sources of revenue other than tuition and state funds.

Steadman suggested that colleges use four standards to judge the propriety of business arrangements, especially one that might return revenue to the institutions: Was it competitively awarded? What were the criteria used? (A decision made based on the size of the revenue stream back to the institution "could be a problem," he said.) Was there full disclosure to the students? Can you show a direct relationship between any returned revenue and the welfare of students?

"If you do all those four things, there are still going to be people who think it's inappropriate." Cuomo, Steadman said, "thinks any revenue sharing is inappropriate. But I disagree."

New Line of Inquiry?

Also during Tuesday's session, it became apparent that colleges may face more scrutiny on student loans -- this time from the U.S. Education Department. F. Robert Huth Jr., executive vice president and treasurer at Middlebury College, revealed during the town hall that regulators from the agency had asked Middlebury officials to set aside three days for a review of their practices in allocating student loans.

The inquiry appears to be an outgrowth of the department's announcement last month that it had sent letters to hundreds of colleges where at least 80 percent of the federal student loan volume goes to one lender, out of concern that colleges might be inappropriately directing student borrowers to one "preferred lender." Huth said that a vast majority of its student borrow through Nelnet. He told his colleagues at Tuesday's meeting that he had been told that Middlebury was one of the 30 colleges facing such a review, but when he asked for a hands of others that were aware of such requests at their institutions, no hands went up.

"God help you," one audience member said.


Be the first to know.
Get our free daily newsletter.


Back to Top