Sallie Mae to Pay $2 Million Over Student Loan Scandal

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The nation's largest student-loan provider will alter its business practices and pay $2 million into a fund to educate students and parents about the financial aid industry 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 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 for college financial aid officers to exotic locations who then directed students to the lenders.

Cuomo is now investigating alleged kickbacks to school officials who steered students to certain lenders.

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.

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.

Sallie Mae is the second lender to agree to the code, which is aimed at making the loan process more transparent.

Sallie Mae, which serves almost 10 million borrowers and has relationships with over 5,600 schools, agreed to stop running call centers or provide other staffing for college financial aid offices, stop paying financial aid officers for serving on advisory boards and will no longer pay for any trips for college loan officers.

Citibank, which does business at about 3,000 schools, last week agreed to donate $2 million to the same fund as part of a settlement with the Attorney General's office.

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.

Last week, Cuomo sent subpoenas to Reston, Va.-based Sallie Mae, requesting information on any current or former employees who had worked at the Education Department over the past six years.

CIT on Monday suspended the top three executives at Student Loan Xpress amid its own investigation into the unit's business practices.

Also Wednesday, Sen. Edward Kennedy, D-Mass., said he has asked the Securities and Exchange Commission to open an investigation into the student loan scandal.

Specifically, 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 one senior official at the U.S. Department of Education.

In a letter sent to the SEC 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.

Kennedy said Balestri sent the officials a "Memorandum of Gift," purporting to show he gave them the stock for free, but Kennedy said all of those receiving stock paid something for it.

The sale of private placement stock could be considered a securities violation, depending on when the sale took place.