msnbc.com news services
updated 4/18/2007 6:26:07 PM ET 2007-04-18T22:26:07

A developing scandal over ties between the student loan industry and college financial aid officers is adding momentum to a congressional push to overhaul the system for college loans.

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Members of Congress say new rules, being pushed by New York Attorney General Andrew Cuomo, on how loan companies deal with campuses should be applied nationwide.

“The case for major reform cannot be clearer. Our current student loan system is broken and national reform is required,” said Massachusetts Democrat Edward Kennedy, who leads the Senate education committee.

Kennedy and Rep. George Miller, D-Calif., who heads the House education committee, are leading the push for congressional action.

The top Republican on the House committee, California Rep. Buck McKeon, also says Congress must pass legislation to curtail the problems found by Cuomo. The state attorney general is scheduled to testify before the committee next week.

Cuomo says his investigators uncovered numerous arrangements that benefited schools and lenders at the expense of students. For example, investigators say lenders have provided all-expense-paid trips for college financial aid officers who then steered students to the lenders.

Cuomo’s office has found that loan officers at a few schools had stock in a company that owned Student Loan Xpress, which was on the schools’ preferred lender lists.

Miller called on the Education Department on Wednesday to temporarily ban colleges from using preferred lender lists.

Cuomo’s investigation has elicited public outrage, making it all but certain that Congress will act, says Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers.

“The main legacy of the investigation I believe is that it opened up space for political reform,” Nassirian said.

Others say legal agreements Cuomo is reaching with lenders and schools must become uniform.

“This is a federal program,” said Terry Hartle, senior vice president of the American Council on Education, an umbrella group of colleges and universities. “In a federal program, you’re better off having one code of standards than fifty.”

Cuomo has agreements with industry leaders Sallie Mae and Citibank and some colleges in which the lenders and schools will adopt a code of conduct. Many in Washington, from both parties, see the code as a potential model for a federal law.

The code bans lenders from paying colleges in exchange for being designated a preferred lender. It also bans lenders from paying for trips for financial aid officers and other college officials. Lenders also cannot pay college employees to serve on advisory boards.

The prohibitions are similar to restrictions in legislation that Kennedy and Miller are pushing. The lawmakers introduced their legislation before Cuomo’s investigation made headlines this month; the measure has gained momentum in light of the investigation.

McKeon recently said the Democratic bill was a good starting point. Through spokesman Steve Forde, McKeon said he plans to introduce his own bill.

Forde said McKeon believes the Democratic bill is too heavy-handed in trying to clamp down on private loans. Such loans operate outside federal programs and usually are more expensive than the federal ones.

One of the main programs relies on banks to make loans; in the other, the government lends students money directly.

Students typically rely on these programs, particularly the bank-based one. Private loans have grown more popular in recent years and now account for an estimated 20 percent of all student loan volume.

The Education Department also is working to address the relationship between lenders and student aid offices. One idea could require schools to have at least three lenders on any preferred lender list.

Sallie Mae would opposes that step, company spokesman Tom Joyce said.

“We think those decisions should be made at the school level, not by bureaucrats in Washington,” Joyce said. Lenders, he added, sometimes give students lower rates when loan volume is high at their schools.

Education Secretary Margaret Spellings recently asked a member of a panel providing advice on the department’s student loan rule-making to step down. Cuomo’s investigation indicated that Johns Hopkins loan officer Ellen Frishberg received consulting fees and had her graduate school tuition paid by Student Loan Xpress.

Spellings also placed a department official, Matteo Fontana, on leave after it was disclosed that while overseeing the loan industry, he owned at least $100,000 of stock in the former parent company of Student Loan Xpress.

Fontana previously worked in the student lending industry, as did many others in the department.

That makes it all the more important that Congress take the lead in addressing the problems highlighted by Cuomo’s investigation, said Nassirian.

The legislation that emerges probably will become part of a higher education bill that Congress is expected to pass this year.

The Associated Press and Reuters contributed to this report.

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