Student loans still pose plenty of pitfalls

In the 1990s, driven in part by concerns that subsidies to private lenders were costing too much, the government began lending directly, creating competition to private lenders. As the market grew, private lenders began fighting back by cutting fees and offering discounted loan rates.

Large schools in the direct lending program began to realize that the loan volumes generated by their students represented a valuable piece of business. In 2003, Michigan State University — then the second-largest direct lender — put its loan business out to bid to private lenders.

Other schools soon followed. But what began as an effort to win concessions for students evolved, at some schools, into a revenue stream for the school's financial aid budget and perks for some individual officers. Apparently, some schools failed to see the ethical conflicts these ideals presented.

"I was surprised to discover that we do have members who didn’t have a well-conceived, well-drafted any conflict of interest policy that was in place for the student financial aid office," said Walda, who is also president of the National Association of College and University Business Officers.

Enter the New York state attorney general's office, then run by Eliot Spitzer, who since has been elected governor of New York. His investigation was picked up by his successor, Cuomo, who announced his findings this year and began negotiating settlements with key lenders and schools nationwide. (The New York attorney general's office extended its jurisdiction on the grounds that state consumer laws applied to New York students no matter where they went to school.)

The settlement by Cuomo's office included seven core principals including everything from a ban on financial ties between lenders and schools to rules barring lenders from posing as college aid officials when dispensing advice to students and families. If a school helping to arrange a loan hasn't signed the code, families can ask if they have similar rules in place.

Though the concessions and promised reforms have brought greater transparency to many schools, it’s not clear that conflicts have been eliminated everywhere.

“There’s one lender that sends students a $300 gift card to consolidate their loans with them, which is an outright violation of the prohibition on inducements — the stuff that’s been on the books and in the regs for years,” said Mark Kantrowitz, founder of FinAid, a Web site that provides a information on student lending and financial aid.

Congress also is considering its own legislation and reportedly is looking into other relationships between private lenders and schools that could pose conflicts. Cuomo's office also is reportedly continuing to look into other lending deals with school affiliates outside the financial aid office.

“There are still more shoes to drop,” said Kantrowitz. “We just saw the New York attorney general shift his focus to athletic associations and alumni associations.”

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