A community college financial aid director was at a meeting a year ago with a group of colleagues from other institutions. Over lunch, one of the aid directors "brazenly admitted to pitting one lender against another so that he could get the best NBA playoff seats." The community college official, who asked not to be named, was horrified that an aid officer would be encouraging lenders to in essence bid on his good will. Others aren't shocked.
Dan Davenport, director of financial aid at the University of Idaho, was offered a trip last year to a Caribbean resort to attend some meetings with a lender. His wife was invited too, all expenses paid. He's so frustrated by the way some lenders seek to influence colleges -- and the way some colleges go along with it -- that he's become a purist. He doesn't just turn down fancy trips: Any pens, pads, candy or tchotchkes that come in from lenders immediately go into a box that gets turned over to a local charity for the homeless. Davenport won't help lenders advertise and he doesn't want to spend Idaho money mailing the items back.
"There is so much money involved in the student loan process that it's out of hand," Davenport said. "What we're seeing now is just the tip of the iceberg. There are lots of things going on that are completely inappropriate."
And we're seeing quite a bit right now. On Thursday, the day after the revelation that three financial aid directors held stock  in a lender they recommended to students on a "preferred lender" list:
- The New America Foundation announced that it had found that the U.S. Education Department official charged with oversight of lenders also held at least $100,000 worth of stock  in the Education Lending Group, the lender that had stock deals with the aid directors and the owner of Student Loan Xpress, which the aid directors recommended. Department officials declined to answer specific questions about the employee, Matteo Fontana, and whether the department knew about the holdings. But Samara Yudof, a spokeswoman for the department, issued the following statement: "The department takes this matter very seriously and our Office of the General Counsel is actively reviewing it." Sen. Edward M. Kennedy (D-Mass),  chairman of the Senate committee with oversight of student loans, responded to the Fontana allegations by saying that it is "inexcusable for students to be paying the price for backroom deals in the student loan industry."
- The University of Texas at Austin and the University of Southern California announced that they were suspending their officials who had held the stock, pending full investigations. Columbia University suspended the other aid official the day before.
- Columbia announced that it would no longer recommend Student Loan Xpress to its students and that the university had demanded that endorsements from its suspended aid director be removed from the company's materials and Web site.
- The loan issue entered the 2008 presidential race,  with Democratic hopeful John Edwards saying that the current loan system has resulted in "huge profits" for banks and conflicts of interests for colleges. Edwards called for a shift to the government's competing direct lending program.
More quietly, much was happening at the campus level and in law firms. One lawyer outside of Washington reported hearing from bond underwriters, consultants and auditors -- all in the last few days -- trying to figure out how to change their practices. In interviews with Inside Higher Ed, the director of financial aid at a large public university that does not engage in most of the practices that have come under scrutiny said that the institution had decided not to let lenders print up brochures about student loans any more. Another college reported getting ready to drop its "preferred lender" list, which is given to students to offer suggestions about where to borrow money.
And amid all this activity, aid officials are debating some tough questions: How widespread are ethical problems? Does the lending industry have too much influence on the professional group that represents aid officers? Should the Education Department be doing more? Can this scandal revive interest in direct lending, which has seen its share of the student loan market shrink? Are the moves colleges are making to distance themselves long overdue or an overreaction? How damaging will the scandal be to the student aid world?
Many loan officials were still shocked Thursday by the way events have played out. Even with many college administrators aware that lenders spend considerable money to get their attention and support, the idea that senior aid administrators would have held stock in a company they recommended to students was hard for them to believe. On the other hand, several people involved in student loans said that they believed that the three officials who have been identified were not the only ones owning stock.
The issue is so sensitive right now that even many loan officials who engage in none of the activities attracting scrutiny said that they did not want to be quoted by name and many didn't want to talk at all. Many aid officials Thursday worried that many good people -- who devote their careers to helping low-income students, and never get stock options or Caribbean junkets -- are being tarnished unfairly by the scandal.
"I have nothing to hide. I know how our lender list came to be compiled, and I know how we administer our [loan] program. And, if need be (God forbid!), I can testify under oath that I've never been offered any incentives to include or exclude any lenders," wrote one long-time aid official in an e-mail. "I'm saddened by what I think will be an erosion of trust between the public and the aid community. That's where the real damage will be seen."
And that's why some aid officials are pushing for their colleagues to take more of a stand now to question longstanding practices that could erode that trust.
Craig Munier, director of financial aid at the University of Nebraska at Lincoln, said that he has "deep reservations" about how closely intertwined the financial aid world has become with the lending industry. He has been urging the National Association of Student Financial Aid Administrators to stop letting lending officials join the group and to stop letting the companies sponsor its events. "We should have emancipated ourselves," Munier said. "Even if those contributions and financial support didn't sway our decisions, it gives the appearance that it may have."
Munier is also the member of a small group of public university financial aid officers. That group meets annually -- with no real budget and no outside support -- and Munier said that the discussions focus on how to help students. Student loans may be part of the equation, but he said he has noticed that when aid officials aren't worried about making association sponsors feel included, much more of the discussion is about aid programs.
"When I go to NASFAA, it will be nearly impossible for me to find a table at lunch where at least one or more people from the industry are not seated at the table, so the conversation invariably feels obligated to include that private sector, and I would love to discuss lots of things that aren't about banks and lending," he said.
When association leaders take money from lenders, individual aid officers don't think about it when they do the same thing, Munier said. Just this week, he said he was on the phone with a colleague at another institution -- someone he respects -- who was boasting about the great tickets he had enjoyed for opening day of the baseball season. In the baseball town in question, those are impossible-to-get tickets. Munier asked who his colleague's friend was -- it was a bank. "Slowly it dawned on him," Munier said, that the bank's gesture probably was about more than friendship. "He wasn't even thinking of it. We need to connect the dots."
Munier said he has tried without success to find out how much of NASFAA's budget comes from the lending industry. And a NASFAA spokeswoman said Thursday she could not locate that information. Even though Nebraska is a direct lending institution, Munier said, the pressure from lenders is constant -- they want his students to take out private loans on top of the funds Nebraska provides. His solution to all the gifts lenders send? "I intercept them. I debrand them -- taking off the names of the companies, and then I put them on a table for students -- they are the ones paying." (Even with that attitude, Nebraska has faced scrutiny  over lending practices, however, involving a deal with the National Education Loan Network to provide funds for graduate and professional students.)
Davenport, of the University of Idaho, said that he thinks colleges should stop giving out preferred lender lists, which in theory help students identify good places to borrow. He said that his office gives out a list of every possible lender -- and he only removes banks if he hears that they are under investigation or have lost eligibility. Colleges need to accept that practices like lender lists, even if developed for good reasons, have lost credibility amid the reports about financial incentives colleges have received from lenders that are on the lists.
"I think any time that there is a connection made between somebody receiving benefits and promoting something for those benefits -- whether true or not -- it is hurting the image of the profession," he said. "Even if we think certain practices such as preferred lender lists are good for our students, if the jury thinks we are guilty, we are guilty," Davenport said.
Not surprisingly, NASFAA takes a different view of the issue.
Larry Zaglaniczny, director of Congressional relations for the association, said that it is important to note that giving athletic event tickets and other gifts to aid officers "is not an illegal practice and is a common business practice." He scoffed at the idea that these gifts have any real influence. "Nobody's going to sell their students out for a ticket to a game," he said.
He also disagrees with the idea that his association's effectiveness is hurt because lenders are involved. "In terms of legislation, and taking positions on regulatory and statutory matters, I've never had anybody approach me and say 'you gotta do this' or some company will drop its membership," Zaglaniczny said. And if a lender did try to influence association policy in a way that helped lenders but not students, he added that he would gladly refund the lender's membership, not change policy.
Zaglaniczny said he had no idea how many lenders are corporate members or their role in the overall budget of the association. (Information from the association's last annual meeting shows a large lender contingent  in the exhibit hall and among the sponsors at special platinum, gold and other levels.)
The association's "Statement of Ethical Principles"  includes a pledge to "commit to the highest level of ethical behavior and refrain from conflict of interest or the perception thereof," but there are no details on what is and is not permitted. Similarly, the National Association of College and University Business Officers -- whose members receive gifts and advisory committee memberships from would-be vendors -- does not have a detailed ethics policy, but does call for members to avoid "conflict or the appearance of conflict between personal and institutional interests."
Some involved in the student loan industry think that the current inquiries by Congress, New York State's attorney general, and others are overblown.
Kevin Walker is the co-founder and CEO of Simple Tuition, a service in which lenders' offers are grouped together so students and their families can compare loan offerings from many entities at the same time. In some ways, Walker said, his company is benefiting from the current uproar over preferred lender lists as some colleges are interested in just advising students to use his service.
But he's not happy about the way the discussion is playing out. "I personally feel the political nonsense going on now is a couple of steps below McCarthyism, and here's not much there there," Walker said. "Most of these accusations are silly."
College aid officials are looking for ways to get good information for their students -- and working with lenders and other companies is just part of that process, he said.
Some aid officials agree.
Pat Watkins, director of financial aid at Eckerd College, said that her institution has never taken any money from lenders that get places on the preferred lender list and that when she has served on advisory committees, she has never taken anything besides basic expenses. And the meetings for those groups, she said, were not at resorts, but at airport hotels.
Watkins said that she thinks it's best to avoid taking money from those on the preferred lender lists because there are so many issues at play for a college to balance. For example, she said you want lenders that students will like and where students will receive caring customer service. But a college also needs to pick lenders with good collection records. Without that, a college's default rate could increase, potentially opening up the college to sanctions.
But even if Watkins doesn't like the idea of taking money from the lenders on the list, she said that the reason many of her colleagues did so wasn't greed. "They are trying to provide more scholarship funds for their campuses," she said. "That's an admirable thing to be doing."
She also said that the reports about stock options and resorts give a false impression of lenders' advisory committees and their roles. She said that the meetings she has attended featured in-depth discussions in which lenders are trying to get a better sense of student and institutional needs. The meetings were serious and provided a chance for her to tell lenders about students' frustrations and requests. "I think students benefited," she said.
A financial aid director for a small for-profit college said he thought the current discussions were missing many key points. For example, he said that stock ownership by a financial aid director in a lender "should not be the smoking gun, since it is common for people to invest in things they are familiar with" and "I would assume that someone would not invest in a company that is bad, so why not have a good company on your lender list?"
Similarly, he said taking modest gifts from lenders doesn't harm anyone, and can help students. "Sure, I am guilty of taking pens, notepads, post-its, rulers and the like from lenders," he said. "These things are shared with others in the office and with the students. Some of my students even rely on these supplies for their class work -- my heart truly goes out to these students trying to better themselves and the life they want to give their families, who at times have to make a choice between lunch and buying a notebook for school."
An aid administrator at a nonprofit private college recounted that the relevant factor for her is that she has a very small budget, and wants to spend it on students. So if lenders want to bring in lunch during the busy time of year, when her staff can't leave their desks, it's OK. At this official's campus, one of the two administrative assistant positions for the office was eliminated, so the college allows a lender -- wearing a T-shirt identifying the lender -- to help with "walk-ins" during the high volume registration period. These lender representatives have never tried to push their loans on students, the aid official said, and the office is so small they would be overheard if they did.
The bottom line for this administrator is that her office needs the help.
Watkins, of Eckerd, said that financial shortfalls are indeed a crucial issue. She said that one of her biggest frustrations about the current debate is about its emphasis. "This is masking what our real problem really is, and that's that the federal government has not provided enough student aid for the last 20 years."