Legislation under consideration by both the U.S. House of Representatives and the Senate does not go far enough in confronting conflicts of interest between colleges and lenders.
The bills have a significant flaw insofar as they can be construed to require the Department of Education to prove that there is a "quid pro quo" relationship between the gifts and payments that lenders provide colleges and the loans the schools' students obtain. A full-fledged gift ban is needed to rid the Federal Family Education Loan (FFEL) program of the types of corrupt practices that have been exposed over the last year.
Despite that misgiving about the legislation, the bills -- as well as new Department of Education regulations that will go into effect this summer -- do make some significant changes that will put an end to some of the most egregious student loan "pay for play" arrangements. For too long, these practices have been considered standard procedure.
Here are four proposals included in the legislation and/or new regulations that we believe are vital to maintain:
Prohibit Lenders from Performing Student-Aid Functions at Schools
Investigations into the FFEL program last year revealed just how common it had become for student loan banks to help staff financial aid offices and run college call centers, which students depend upon to answer questions about financial aid. Under these arrangements, call center operators often falsely identified themselves as school employees. These types of deceptive practices left students unaware that the loan advice they were receiving was tainted. Some cash-strapped colleges have complained that the restrictions included in the Department of Education regulations and both bills are too restrictive and will be extremely burdensome on them. But, as the Department stated in a Federal Register notice announcing its new rules, colleges that participate in the federal student aid programs must be "administratively capable" of doing so. They shouldn't be dependent on lenders to manage the programs for them.
Bar Loan Providers from Conducting or Participating in Student Loan Exit Counseling
The Higher Education Act requires that colleges conduct exit interviews with student loan borrowers before they graduate to provide them with information on their repayment options and responsibilities. However, it has become clear that many colleges have farmed out this task to lenders, who have improperly used the sessions to promote new loan consolidation products.The Department's regulations and the Senate bill would prohibit lenders from taking part in exit counseling. The House bill would allow loan providers to participate in these sessions as long as a college official is in charge, and they do not promote their loan offerings. This is another case where we believe that a bright-line standard is needed. Students depend on schools to provide them with impartial advice, and we don't see how they can do so if they allow lenders to be involved in the process.
Prohibit Financial Aid Administrators from Serving on Lender Advisory Boards and Acting as Consultants for Loan Companies
Lenders and financial aid administrators say that having college officials serve on lender advisory boards helps loan companies better serve students. But too often these advisory board sessions have turned into all-expense-aid junkets where lenders wine and dine financial aid officers, with the express intent of growing their loan business. Some financial aid administrators have used their advisory board positions to become paid consultants for the companies, actively promoting the lenders' products to other colleges. The Department of Education and the House bill would bar aid administrators from serving on lender advisory boards. The Senate bill would allow aid officers to continue to serve on advisory boards and be reimbursed by lenders for "reasonable expenses," but like the House measure would prohibit them from acting as consultants. We support a clear-cut prohibition, as we believe these arrangements make it harder for financial aid administrators to fulfill their core obligation to serve as impartial intermediaries for their students. We are confident that lenders will find other ways to improve their loan products.
Bar Colleges from Assigning First-Time Borrowers' Loans to a Particular Lender Through Award Packaging or Other Methods
The Higher Education Act gives students who attend FFEL schools the right to choose their own lenders. However, some colleges have found clever ways to steer students to favored lenders. Some universities, like the University of Miami for instance, have shepherded prospective borrowers to Sallie Mae, which provides them with a pre-filled out master promissory note that they just have to sign and return ot the loan company. In other words, the students are never told that they have other loan options. While we believe this practice is already illegal, we are pleased that the Senate bill would explicitly forbid it.
The truth is if the Department of Education had enforced aggressively the current Higher Education Act's "anti-inducement" clause, much of this legislation wouldn't be necessary. But as has been said by others, they've been asleep at the switch and all Congressional authorizers can do at this stage is make explicit the types of kickback schemes and improper influence arrangements that should not be countenanced by the Executive Branch. If the Department continues to fail to enforce the law, however, Congress will need to take more aggressive action.
To read more, please visit www.HigherEdWatch.org