Colleges, Lending Companies Agreed to Share Revenue from Student Loans, Official Says

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Cozy arrangements between colleges and the companies that lend their students billions of dollars are far more widespread than anticipated, New York Attorney General Andrew Cuomo told The Associated Press Tuesday, even as another college financial aid officer was suspended amid a probe into the $85 billion industry.

Cuomo is investigating alleged kickbacks to school officials who steered students to certain lenders. His investigators say they have found numerous arrangements that benefited schools, financial aid officers and lenders at the expense of students.

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.

So far, six schools, including the University of Pennsylvania and New York University, have agreed to reimburse students a total of $3.27 million for inflated loan prices caused by revenue sharing agreements, Cuomo said. The schools will return money to students who took out loans during the time the revenue sharing agreement was in effect. Students will be refunded based on the amount they were loaned.

Cuomo would not divulge where the burgeoning investigation is headed next, including whether more subpoenas are on the way. But he said the investigation could lead to criminal charges against high-ranking officials at both lending companies and universities.

"This is like peeling an onion," Cuomo said. "It seems to be getting worse the more we uncover. It's more widespread than we originally thought ... More schools and more lenders at the top end.

"We have demonstrated this is not just the exception," he said. "This is the rule."

On Monday, a loan company that has been at the center of the investigation, CIT Group Inc., placed three top executives at its Student Loan Xpress division on paid leave following allegations of stock transactions with a high-level U.S. Department of Education official and college financial aid officers.

The Department of Education official who oversaw parts of the student loan industry was also placed on leave after it was reported that in 2003 he owned at least $100,000 worth of stock in Education Lending Group Inc., the former parent of Student Loan Xpress. The company was acquired by CIT in 2005.

A number of student loan officials at different schools have also been placed on leave pending the investigation.

On Tuesday, Capella University, a Minneapolis-based online school, said it suspended its director of financial aid after he acknowledged accepting consulting fees from Student Loan Xpress.

Financial aid director Timothy Lehmann was put on paid administrative leave after Cuomo's office said he received more than $13,000 in fees from the company. Capella President Michael Offernan says Lehmann disclosed the payments last Friday.

The school is cooperating with Cuomo's office and doing an internal investigation as well, Offernan said.

Cuomo said he suspects "dozens" of financial aid officers around the country have similar arrangements that he has called deceptive, unethical and at times, illegal.

"No one is even defending the situation anymore," he said.

Last week, Cuomo sent subpoenas to SLM Corp., commonly known as Sallie Mae, requesting information on any current or former employees who had worked at the Education Department over the past six years.

In some cases, investigators said, lenders provided all-expense-paid trips for college financial aid officers to exotic locations. Financial aid officers at schools in some cases served on loan company advisory boards, Cuomo said.

Cuomo said the arrangements are particularly predatory because of the relationship between students and the colleges they pick.

"Ninety percent of the students take the 'preferred lender,"' he said. "Why? Because that's the nature of the relationship. You trust the school. The school is in a position of authority. The school is there to nurture you."

Cuomo said various officials have been examining the issue for about a year but his investigation was spurred after a lender came to him to complain about the domination of a few lenders in the lucrative market. Cuomo would not name the lender.

"The new lenders were saying because they weren't doing the conferences, they didn't have these relationships with financial aid offices, they weren't willing to do or hadn't been doing the financial aid incentive," Cuomo said. "They couldn't even compete."

The attorney general said he has talked with lawmakers in Washington -- including Sen. Edward Kennedy, D-Mass., who heads the Senate Health, Education, Labor and Pensions Committee, about new legislation to reign in the student loan industry.

"There hasn't been enough supervision," he said. "There hasn't been enough regulation."

Earlier this year, House Democrats in Washington introduced a bill that would ban gifts from lenders to college employees and would require lenders to disclose the terms of their arrangements with colleges and universities.