Student Loans Target Of Investigation

Editor's Note: Additional reporting which appears in bold text has been added to this story since it was originally published on March 16, 2007.

A nationwide investigation by New York State Attorney General Andrew Cuomo is centering on an alleged kickback scheme involving 100 colleges and a half-dozen student loan providers around the country – a scheme that Cuomo says betrays the trust of students
and their families.

Cuomo, who took office in January, believes the schools and lenders are engaged in deceptive lending practices that make the cost of higher education higher than it should be.

"I am personally outraged that this has been going on for so long and is as widespread as it is. These are in colleges all across the country, public and private, large small, it doesn't make a difference," Cuomo tells CBS News.

The stakes are high, with two-thirds of all college and graduate students leaving school with debt. Student loans are now an $85 billion a year industry which has grown 27% since 2001. Now is the season – this month through May 1 – when prospective and active students are negotiating and securing their student loans for next academic year.

Cuomo has sent letters requesting financial documents from universities to examine their arrangements with banks and loan companies designated by schools as "preferred lenders," which 90% of student borrowers use. Typically – what troubles Cuomo – a school may receive a percentage of the interest earned on loans steered toward lenders. That cash payout could be money saved by students and their families.

"The common denominator is an incentive that goes back to the school at the expense of the student," Cuomo says, "And it's wrong. And it's potentially illegal. And we're going to enforce the law."

The lenders under investigation include California-based Education Finance Partners, and its ties to some 65 schools, along with the nation's largest student loan provider, SLM Corporation, better known as Sallie Mae. The other key lenders" being investigated are NelNet, also a public company, EduCapp, CIT, and The College Board. All say they are cooperating with the probe.

The schools targeted in the investigation range from Boston University and Syracuse in the East, to Pepperdine to Clemson and Texas Christian University in the South, and Pepperdine out West.

According to documents obtained in the investigation, under a preferred lender agreement with EFP, Drexel University, in Philadelphia, gets a kickback of .25% on the interest earned on the first $1 to $2 million in loans it steers to EFP and .5% of the interest earned on the amount above $2 million.

An unwritten "revenue sharing" agreement between Citibank and Syracuse University pays Syracuse .5% of the interest earned on student loans steered to the bank – a deal worth more than $100,000 a year to the upstate New York school, according to the attorney general's probe. Last academic year, 98% of Syracuse students with loans borrowed from Citibank.

The incentives offered to school administrators by lenders lobbying for the "preferred" label include cash payments and expense-paid junkets, according to the investigation.

In May 2005, travel records show, EFP treated financial aid officers from New York University and other schools to a trip to the golf resort in Pebble Beach, California. Correction: This report erroneously named EFP as funding the Pebble Beach trip. The company involved was EduCap of McLean, Va.

Last February, 2006, EduCapp offered school officials an all-expense paid trip to Nevis, an island in the Caribbean, for a winter Loan to Learn Education Summit, complete with rooms at the luxurious Four Seasons Hotel, which can cost $655 a night in high season.

"We are confident that the Loan to Learn Education Summit will be an extraordinary educational and motivational program and one of the most memorable gatherings of the year," EduCapp's invitation letter said. The summit, however, was cancelled, once it was exposed by the U.S. Public Interest Research Group.

Congress is considering legislation curbing many of these practices, because they may involve the federally-guaranteed student loans.

CBS News has learned that Senator Edward Kennedy's office is investigating whether the financial aid director of the University of Texas at Austin, Larry Burt, once asked Sallie Mae to send him and his wife on a free trip to Paris in exchange for sending student loan business their way. Burt was recently appointed by Secretary of Education to serve on the Advisory Committee on Student Financial Assistance.

Kennedy, who chairs the Senate Committee on Health, Education, Labor, and Pensions, has requested Sallie Mae turn over documents about its "questionable favors and benefits" with U of T. Sallie Mae says the allegation is "patently false" and that it was "never asked to pay for any such trip," while Burt denied accepting any favors.

"I have never asked Sallie Mae in any way, shape, or form for a favor, whether it be travel or a shoe shine," Burt said.

He showed CBS News receipts from American Airlines frequent flier miles used to purchase tickets for himself and his wife on their Nov. 2005 trip to Paris with friends. "I sure wish if they had questions, they would call me," Burt said of the Senate committee.

Lenders affiliated with Sallie Mae account for only three of the twenty institutions on U of T's preferred lender list and less than 10 percent of the school's total loan volume, Burt said.

The gift-giving has crept into the National Association of Student Financial Aid Administrators convention, according to Raza Khan, President of MyRichUncle, who complains his firm has been blackballed from preferred lender lists even when he has offered low interest rates. He tells CBS News he witnessed big preferred lenders give away Coach bags, Tag Heuer watches, and even a Ford Mustang at last year's NASFAA gathering.

"We really thought that having the best and most competitive product would win the hearts of financial aid administrators. That proved not to be the case," says Khan, who refuses to offer any gifts or enticements to school officials. "We've had instances where a student applied for a loan and the financial aid office has replaced the loan through MyRichUncle with the loan of another lender," he says.

NASFAA President Dallas Martin says abuses are "rare" and his 3,000-member schools "play by the rules." "They are ethical. They don't cut corners. They don't take bribes," Martin says in a letter to Cuomo posted on the group's Web site. "I agree with you that any preferred lender list abuses and genuine conflict of interests should end, and it would serve the public interest to have greater transparency in how and why a school uses a lender list."

Cuomo says full disclosure is the name of the game -- that students and families should be informed of any existing deals for preferred lenders. He may sue lenders to get them to change their ways and negotiate settlements with schools to force them to pay families back. Criminal charges are not out of the question.

"Many of these schemes develop over time. And this has been going on for 10, 20 years in some cases," Cuomo says. "And just because everyone is doing it does not make it OK."

Reporting by Armen Keteyian, Bert Rudman, Phil Hirschkorn, Wendy Krantz, Michael Rey, Laura Strickler and Ariel Bashi.