Last week, the New York Attorney General's office reminded Sallie Mae and Student Loan Express that they had no right to involve universities in underhanded tactics to generate business. The University of Pennsylvania also acknowledged that it received fees from Citibank to refer student loan borrowers to the institution.
Whatever happened to a simple apple for the teacher?
The lenders have a place on the so-called "preferred lender" lists maintained at colleges and universities, which means the institutions encourage students and their families to borrow through them. For Sallie Mae's part, these encouragements apparently included paying financial aid officers to appear on advisory boards, and paying for travel expenses, including trips abroad. Sallie Mae agreed to pay $2 million into a fund devoted to educating college-bound students about all of their financing options and stop making those payments to financial aid officers.
San Diego-based lender Student Loan Express put three of its top executives, Vice Chairman Robert deRose, CEO Mike Shaut and President Fabrizio Balestri on administrative leave, after the New York AG's office accused it of paying consulting fees to a student loan officer at Johns Hopkins University and paying consulting fees to financial aid officers at two other universities.
Sallie Mae and Student Loan Express were correctly reprimanded for supposed ethical violations in pursuit of student loan business through colleges and universities. Perhaps averting a harsh reproof,
the University of Pennsylvania announced that students who took out loans from the Penn CitiAssist program for the 2006 and 2007 academic years would receive reimbursements averaging $500.
The changes are not likely to cut back on the amount of student loans originated through universities' preferred lender initiatives, or the number of loans that are subsequently securitized, most market participants say.
It will, however, create a more level playing field for student aid business and shift volume around to a wider field of loan providers. Operators who never previously made universities' A-list of lenders will get a second look, capital markets professionals predict. Determining which lenders benefit the most from those university "preferred lender" lists is difficult, because not even The College Board formally records that information.
"Most people think it is a good thing for the preferred lender list and for the pricing of student loans," one market participant said. "I think that means some of the entrenched lenders might not do as well."
Last week, three major student lenders were called to account for supposed ethical violations, but more will probably come to light in the coming months. The corrective measures make for a great start. Students and their families take on enormous financial obligations in pursuit of better lives. University financial aid offices, often dotted with handfuls of students hunting for the best education financing options, can be cheerless places. Should they be shady, too?
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