The nation’s largest student loan provider will stop offering perks to college employees as part of a settlement announced Wednesday in a widening probe of the student loan industry.
SLM Corp., commonly known as Sallie Mae, also agreed to pay $2 million into a fund to educate students and parents about the financial aid industry, and it will adopt a code of conduct created by New York Attorney General Andrew Cuomo, who is heading the probe.
Cuomo said the expanding investigation of the $85 billion student loan industry has found numerous arrangements that benefited schools and lenders at the expense of students. Investigators say lenders have provided all-expense-paid trips to exotic locations for college financial aid officers who then directed students to the lenders.
“Our position is very simple,” Cuomo said. “Loan decisions should be made in the best interest of the students, and not the best interest of the school.”
Sallie Mae CEO Tim Fitzpatrick said in a statement Wednesday, “We are pleased that Attorney General Cuomo has recognized Sallie Mae’s leadership in the student loan industry and our ethical market practices with students and schools.”
The language closely resembled that of a statement from Citibank, which last week also agreed to a $2 million settlement with the Attorney General’s office.
Investigators found that many colleges have established “preferred lender” lists and entered into revenue sharing and other financial arrangements with those lenders. Some colleges have “exclusive” preferred lender agreements with the companies.
“There is a spectrum of what we consider to be deceptive and illegal practices, from financial incentives that go back to the schools to financial incentives to financial aid officers, to perks to financial aid officers, to employees of lenders being stationed at schools,” Cuomo said at his Manhattan office.
The newly established code of conduct prohibits revenue sharing between lenders and schools, mandates disclosure of relationships between colleges and lenders, sets restrictions on how lenders are chosen for school “preferred lender” lists, and bans gifts or trips to university employees from lenders.
Reston, Va.-based Sallie Mae, which has relationships with more than 5,600 schools, agreed to stop running call centers or providing additional staff for college financial aid offices. It will also stop paying financial aid officers who serve on advisory boards and will no longer fund trips for school officials.
So far, six schools — the University of Pennsylvania, New York University, Syracuse University, Fordham University, Long Island University and St. John’s University — have agreed to reimburse students a total of $3.27 million for inflated loan prices caused by revenue sharing agreements, Cuomo said.
Those schools, along with all 29 four-year State University of New York campuses and St. Lawrence University, also agreed to abide by the code of conduct.
Within the past week, six financial aid officers at various schools and a federal Department of Education official were placed on leave after Cuomo’s office said they received stock, consulting fees or other compensation from Student Loan Xpress. The company was acquired by CIT Group Inc. in 2005 when it bought Education Lending Group Inc.
On Monday, CIT suspended the top three executives at Student Loan Xpress amid its own investigation into the unit’s business practices.
Sen. Edward Kennedy, D-Mass., said Wednesday he has asked the Securities and Exchange Commission to open an investigation into the student loan scandal.
Kennedy, who chairs the Senate education committee, asked the SEC to look into the transfer of stock from the current president of Student Loan Express, Fabrizio Balestri, to loan officers at three schools and the official at the U.S. Department of Education.
In a letter sent to the SEC on Tuesday night, Kennedy said his own investigation revealed that Balestri apparently acquired the stock through a private placement of stock at a discount and then sold it to the others at a discount. The sale of private placement stock could be considered a securities violation, depending on when the sale took place.
An SEC spokesman declined to comment.
A spokesman for CIT Group did not return requests for comment on Kennedy’s letter.
Luke Swarthout, of the U.S. Public Interest Research Group, said the settlement with Sallie Mae, while helping to shed light on problems in the student loan industry, was a “Band-Aid” approach to bringing more consumer choice and better rates to students.
“We really feel addressing the broader problems in the industry will require federal congressional action,” he said.