Education Dept. tightens loan rules

Proposed set of standards would curtail lenders' questionable marketing practices

June 02, 2007|By New York Times News Service.

The federal Education Department, criticized for lax oversight of student loans, released proposed rules yesterday that would set new standards for universities and ban lenders' marketing practices that have resulted, in some cases, in loan company payoffs to university officials.

The 225-page package of rules represents a change in direction by the department, which for years had ignored calls by its inspector general, Democratic lawmakers and even some loan-industry officials for it to be more aggressive in policing the $85 billion student loan industry.

The rules would, for the first time, require universities to include at least three loan companies on any list of lenders they recommend to students, and it would ban many of the gifts and payments to financial aid officials that lenders have been offering to win student loan volume.

"The secretary of education is amending these regulations to strengthen and improve the administration of the loan programs," states the proposal, which the department said had been sent to the Federal Register for a 60-day comment period.

The education secretary, Margaret Spellings, created a task force in April to draw up the regulations after an effort to win consensus on a similar package of rules among representatives of students, lenders and academic institutions in "negotiated rule making" collapsed.

Over the past few months investigations in Congress and in the states, led by New York's state Attorney General Andrew M. Cuomo, turned up an array of undisclosed relationships between universities and lenders, and conflicts of interest on the part of financial aid administrators. Some university officials who were promoting particular lenders had received stock on favorable terms, consulting payments or gifts from loan companies.

Just this week, the Education Department's own inspector general reported to Congress that the department had made `'minimal" progress in dealing with complaints about abuse in the nation's government-backed student loan program.

Lenders have long been barred by law from offering inducements to gain loan applications. But what is an inducement is not entirely clear. In 2003, an assistant inspector general criticized the department for not giving any updated opinions about what kinds of inducements were barred since 1995, even though the competition for loan business had escalated sharply since then.

Department officials have said in the past that they did not have the authority to oversee many of these practices because they involved private loans - those not guaranteed by the federal government. They had said they wanted financial aid administrators and the loan industry to police themselves.

The proposed regulations would still only cover federally guaranteed loans. They identify specific practices that would be barred, including "offering, directly or indirectly, any points, premiums, payments or other benefits to any school or other party to secure" student loan volume in the federally guaranteed loan program. Lenders who offer inducements run the risk of losing the federal guarantee on affected loans, under the proposal.

They would also ban a college's "access to a lender's other financial products, computer hardware, and payment of the cost of printing and distribution of college catalogs and other materials at less than market rate."

The regulations appeared unlikely to meet much resistance. The Consumer Bankers Association indicated that it would be unlikely to seek anything more than minimal changes, particularly since Congress is already moving to enact even tougher restrictions through legislation.

Robert Shireman, a higher education policy adviser in the Clinton administration who is executive director of the Institute for College Access and Success, said that the rules could still allow philanthropic gifts by lenders to universities that might not be explicitly linked to loan volume.

"There can be the same kind of wink and a nod that occurs around campaign contributions," Shireman said.

Separately, the Education Department announced yesterday that Spellings had named Lawrence Warder as acting chief operating officer of the office of Federal Student Aid, previously overseen by Theresa S. Shaw, who stepped down.

Warder, who has been chief financial officer of the Education Department since July 2006, previously worked for years as a management consultant at Deloitte Consulting.

Investigations of conduct in the student loan industry are not over. Sen. Christopher J. Dodd, D-Conn., chairman of the Banking Committee, has announced plans to conduct a hearing June 6 to explore ties between lenders and colleges and universities.

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