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Cuomo: Student Loan Scandals Flourished Because Ed. Dept. ‘Asleep At The Switch’

Congress must crack down on questionable practices between student loan companies and higher education institutions to help restore consumer confidence in the $85 billion student loan industry, lawmakers and a chief industry critic said Wednesday.

Recent reports about preferred lender lists, gifts to college financial aid directors and revenue-sharing practices that give colleges an incentive to push certain loan companies are taking a toll on students and their families, said New York Attorney General Andrew Cuomo, who initiated many of the investigations.

“It is crucial that Congress act promptly to end the conflicts, perks and revenue-sharing that have cost our students dearly,” said Cuomo, the featured witness at the House hearing. His office has cited several colleges for favoring some lenders over others, often through revenue-sharing agreements that give colleges a small share of student loan proceeds. Several lawmakers have labeled these arrangements as kickbacks.

Financial aid directors at some institutions also have accepted travel and entertainment perks from lenders that appear on their colleges’ preferred lender lists.

“We’re talking about a system that is spiraling out of control,” said U.S. Rep. George Miller, D-Calif., chairman of the House Committee on Education and Labor, which conducted the hearing.

Such practices have major implications for low-income and minority students, who make up a large share of loan borrowers. About 58 percent of Hispanic students and 55 percent of African American students already leave college with an unmanageable level of loan debt, compared with 39 percent of all students, says the State Public Interest Research Group. Several studies also show African American students with higher default rates.

In his testimony, Cuomo took particular aim at the U.S. Department of Education for its inaction on the issue. A department employee who managed student aid is now on administrative leave after reports that he sold considerable stock in one company, Student Loan Xpress.

“Part of the reason the practices we have uncovered have been able to flourish nationwide over the past several years is because the U.S. Department of Education has been asleep at the switch,” Cuomo said. “The failure of the department to pass adequate regulations is disappointing and irresponsible.”

Education Secretary Margaret Spellings this week created a Task Force on Student Loans to make recommendations on lender-college practices. But Cuomo said that move was insufficient. “It’s too little too late,” he said. “It’s not a time for task forces and study groups. It’s a time for action.”

No department official testified at the session, but Spellings quickly defended her response to loan issues following the hearing.

When Congress failed to approve a long-term extension of the Higher Education Act last year, Spellings said she convened a committee of college leaders to negotiate regulatory changes on issues such as lender practices. In January, the department also offered draft language to clean up language on preferred lenders, but the panel never reached any agreement.

“We have taken a number of steps” to strengthen student aid accountability, despite the past inaction of Congress, she said.

Spellings also blasted Cuomo for some of his comments to the House panel. “I share his concerns on lender practices, but believe his testimony was ill-informed on the department’s actions and on federal law.”  

Among other criticisms, she said it is “misleading” to equate violation of a state consumer law with violation of the Higher Education Act. Spellings said her department is investigating whether lenders and colleges have violated HEA’s student aid provisions.

But Cuomo and several lawmakers said the best solution is to immediately enact the Student Loan Sunshine Act, a Democrat-led proposal to reform student loan practices.

The bill would ban gifts from lenders to college employees and require lenders to disclose terms of their agreements with colleges and universities. As a result, colleges would have to explain why they add companies to any preferred lenders list.

Cuomo praised the plan, saying that if enacted, it “will go a long way toward bringing the much needed disinfectant of sunlight to this tainted industry.”

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