A Reminder From New York

After months of silence on student loans, Cuomo announces another settlement, unveils new code of conduct, and warns Congress not to dally on Higher Education Act reforms.
December 12, 2007

In case anyone was wondering, Andrew M. Cuomo still cares about student loans. And he made clear this week that he was keeping his eye not only on colleges and lenders, but on Congress as well (more on that later).

After months of relative silence -- in a year in which the student loan inquiry he spawned often dominated the higher education headlines -- the New York attorney general made news twice this week, and warned that more was to come.

"We started the year talking about the student loan investigation, and we're going to end the year talking about the student loan investigation," Cuomo said at a news conference Tuesday, at which he announced a settlement against a loan consolidation company that has marketed its loans through dozens of big-time college athletics departments, and unveiled a new "code of conduct" designed to guard against irresponsible marketing of loans directly to students.

Under the settlement announced Tuesday, in which Florida Attorney General Bill McCollum joined, the lender known as University Financial Services (which also does business as Student Financial Services) agreed to end arrangements in which 63 colleges and sports marketing companies marketed the company's loan consolidation services in exchange for payments. In exchange for the funds, the colleges (or in many cases, the marketing companies that manage the business on their athletics departments' Web sites) gave the lender the right to use their names, logos and mascots to promote the loans.

Although some of the colleges insisted that they had received nothing but lump-sum payments from lender, and that the arrangements were simple advertising deals that did not cross any legal or ethical lines, Cuomo said his four-month investigation had found that more than half of the colleges had arrangements -- which his office derided as "kickback schemes" -- that called for them to receive additional funds for each loan application they produced. Most of the arrangements ceased before any such per-loan payments changed hands, officials in Cuomo's office said, but the deals still crossed a line, by "fooling students into taking loans that seemed to be sponsored by the schools," said Benjamin Lawsky, special assistant and deputy counselor to Cuomo.

"It's almost unbelieveable that the school mascots and logos would be used in this way where the school's mascot becomes a wolf in sheep's clothing," Cuomo said at the news conference. At the event, the attorney general trotted out a student from Central Michigan University who said he had been fooled into consolidating his loan through University Financial Services, when, at a sporting event, its representatives persuaded him to fill out some papers to explore consolidating a loan. The company's officials were dressed in Central Michigan sweatshirts and sitting at a table with a banner that said "University Financial Services," the student, Mike Palma, said. "I thought they were from the university's financial aid office, and were there to help me."

"The company's entire business model was to appear to be each school's 'student financial services' operation," said Lawsky, the Cuomo aide.

Officials from Central Michigan did not respond to requests for comment; officials of the lender also could not be reached for comment. Among the other institutions that Cuomo identified as having arrangements with University Financial Services were Florida Atlantic and Florida State Universities, Rutgers University, the Universities of Kansas, Oregon, Texas at El Paso and Wake Forest University. He did not distinguish which ones had deals that called for them to receive per-loan payments and which ones did not.

While University Financial Services did not admit any guilt in the settlement, and was not required to make restitution to Cuomo's office, the lender did agree to publish advertisements in student publications at all 63 colleges and universities urging students to protect themselves when they shop for a loan.

The latter aim was the focus of the other major effort that Cuomo announced Tuesday. Following on his earlier "code of conduct" aimed at defining new boundaries for the relationships and financial dealings between lenders and colleges -- on which the New York legislation and other states' and institutions' guidelines were modeled -- Cuomo unveiled a new set of guidelines for lenders who market private student loans directly to consumers. This is an area of emerging concern to policy makers and advocates for students at a time when the traditional channels through which students have learned about loans -- colleges' preferred lender lists -- have increasingly come in for scrutiny from Cuomo and others.

The new proposed code would, among other things:

  • Bar lenders from using "misleading marketing tactics" that Cuomo's office said its continuing inquiry into "direct to consumer" student loan marketing has uncovered, such as lenders using fake insignias or other devices (like eagles) that make them look like they came from the federal government, as well as fake checks or deceptive rebate offers.
  • Prohibit lenders from using gift cards, sweepstakes or other offers to entice students to sign up for loans.
  • Require lenders to submit uniform information to borrowers to help them compare one loan provider's offerings to another using the same information. (Cuomo released a sample of the disclosure form.) Lenders would have to provide the information when a student applies for loans, when an application is approved, and when the borrower signs a promissory note.

Other provisions mirror those contained in the federal legislation Congress is considering, such as requiring lenders to advise students that they should exhaust their federal loan options before turning to private loans.

The announcement about the settlement and the new code of conduct came a day after Cuomo sent a subtle but clear message to members of Congress who are poised to end their third straight year without passing legislation to renew the Higher Education Act, which this time around includes a slew of provisions aimed at tightening the federal government's regulation of the student loan industry. Appearing with Rep. Peter King (R-N.Y.) at an event with students at a Long Island high school Monday, Cuomo urged Congress to pass federal legislation to mirror the Student Lending Accountability, Transparency and Enforcement Act that New York's legislature passed last summer.

“As tuition costs skyrocket and thousands of students struggle to pay off enormous debt, our investigation of the student-loan industry continues to uncover new dimensions of a nationwide crisis,” Cuomo said Monday. “New York has already outlawed such illegal activities but college bound students across the country deserve similar rights and protections. There is no better solution than national legislation which will prohibit the range of illegal and improper industry-wide activities and give students the right to protect themselves from unscrupulous lenders and schools."

Congress last renewed the Higher Education Act in 1998, and lawmakers began working on the extension in 2002. Much of the momentum for passage of the sweeping law that authorizes most financial aid and other federal higher education programs was undermined by the passage last year and this of budget reconciliation bills that dealt with many of the most important provisions of the Higher Education Act (especially the ones that provide actual new dollars for students and colleges). As a result, the legislation has lagged, and while versions of the Higher Ed Act measure have passed the Senate and await approval in the House, it is now not projected to be taken up until some time early next year.

Cuomo made it clear in an interview with Inside Higher Ed this summer that he viewed Congress's passage of the Student Loan Sunshine Act as necessary to ensure that changes in the student loan industry and in the relationships between colleges and lenders take hold nationally, and his comments Monday can be seen as a signal -- a warning, even -- to lawmakers not to drop the ball on a politically popular issue in an election year.

Congressional Democrats say they have no intention of doing so. In a statement Tuesday in response to Cuomo's latest actions, Rep. George Miller (D-Calif.), chairman of the House of Representatives Education and Labor Committee, praised Cuomo's new code of conduct and compared it to the provisions governing private loans that are in the Higher Education Act bill that the panel approved last month. "Consumers clearly need and deserve better protections when navigating the often murky world of student loans, and we intend to enact our reforms into law in the coming months," Miller said.


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