The nation's largest bank and 33 universities, including the University of Pennsylvania and New York University, have agreed to change the way they conduct their student loan business.
Citibank on Monday became the first major student lender to adopt a code of conduct proposed by New York State Attorney General Andrew Cuomo and agreed to contribute $2 million to a new fund to educate college-bound students and families about school loans. Citibank Student Loan Corporation, with $33.7 billion in loans to 2 million current and former college students from 3,000 schools, is second behind Sallie Mae in student loan volume.
The code of conduct bans the kind of revenue-sharing between lenders and colleges that Cuomo has described as kickbacks. As CBS News reported last month, Cuomo has set out to reform the $85 billion-a-year industry, requesting documents and financial records from more than 100 schools and a half-dozen lenders.
The chief practice that he hopes to curtail is when lenders pay back schools a portion of the loans steered their way (typically .25 to .50 percent of the net value), payments that tend to grow when a school designates a bank as a "preferred lender," because 90 percent of students and their families seek loans from those institutions.
Cuomo has already announced his intent to sue one lender, Education Finance Partners.
"Schools participate in our revenue reinvestment program on a voluntary basis and can join and leave anytime they want," EFP CEO Tamera Briones said Monday. "EFP provides these funds directly to the schools because these institutions are in the best position to know which students have the greatest financial need."
The new code requires schools to disclose why it has chosen some lenders to be "preferred" and bans financial aid officers and other school officials from receiving more than nominal gifts from lenders.
Another change: No longer can lenders answering telephone queries identify themselves as school representatives when calls made to school loan hotlines are sometimes forwarded to outsourced call centers. (Citibank says it never did this.)
NYU, where tuition costs undergraduates $33,420 a year, received $1.4 million in shared loan revenue from Citibank over the past five years. Citibank had offered lower interest rates than eight other bidders aiming to be NYU's preferred lender, but Cuomo felt the school's financial self-interest was inadequately disclosed.
From now on, every loan brochure must state, and not in the fine print, that no one is required to use a preferred lender. NYU will refund the $1.4 million to a borrower reimbursement fund.
The University of Pennsylvania, which costs $35,916 per undergrad per year, will donate $1.6 million it received from Citibank the past two years into that fund, a refund of $500 per participating student. Other schools on board with the code of conduct and returning loan rewards are Syracuse ($164,000), St. John's ($81,000), Fordham ($13,800), and Long Island University ($2,435).
"We will refrain in the future from entering into such arrangements," Citibank's Student Loan Corporation CEO Michael Reardon told Cuomo in a letter. In a public statement, Citibank said it never engaged in gift giving and for 50 years it "has been, and continues to be, a leader in raising the standards of good practices and integrity in the higher education financing field."
Penn and NYU and other schools have said they had applied their loan profits to financial aid programs anyway.
"These schools and Citibank have made the responsible choice and are showing themselves to be industry leaders," Cuomo said. "We are beginning the process of restoring trust between universities and students."