May 14, 2007

Expanding Investigations Require Review of School Loan Procedures

Holland & Knight Alert
Gordon P. Katz

The nation’s “for profit” student loan industry is an $85 billion business. High tuition and large numbers of middle and lower class students have made loan programs involving such lenders a major component of financial aid at many colleges and universities. Many institutions have “preferred lenders” to which they direct their students.

In recent months, regulatory attention has focused on such “preferred lending” programs. Sparked initially by a complaint of unfair competition by a lender upset about being excluded from such a list, the U.S. Department of Education and several state Attorneys General have commenced investigations of such programs. On May 9, 2007, Massachusetts Attorney General Martha Coakley announced her office had launched its own investigation into deceptive practices in the college loan industry. Some Massachusetts colleges may very well see subpoenas from the Attorney General’s office in the weeks ahead.

The findings and results of such investigations thus far include the following:

• Kickbacks or revenue sharing agreements with colleges in exchange for placement on the “preferred lenders” list have been identified.

• While some of the so-called kickbacks have been donations to the colleges’ scholarship programs, others have been characterized as “gratuities” or “education trips,” such as resort travel, provided to school administrators.

• At least six college financial aid directors and an official of the U.S. Department of Education have been identified as holding stock in or accepting payments from lenders.

• There are allegations that some lenders have sought artificially high rates of return on student loans.

• While already obtaining settlements with a number of schools both inside and outside the state, the New York Attorney General has indicated that he might bring suit against schools on the ground that “preferred lending programs” or “revenue sharing agreements … may have misled” student borrowers and their parents.

Apart from increased regulatory scrutiny and the promulgation of new rules for student lending programs, observers also believe that colleges may soon find themselves the target of consumer class action litigation as a result of their participation in such “preferred lending” programs. This is the other shoe waiting to drop.

Being Proactive: What Can You Do Now?

In the face of these expanding investigations and in anticipation of possible litigation, what can colleges do now? First, self audit your program. Determine the nature and operation of your current program and whether your school – or any of your employees – have received, or could receive, anything of value from any lender. Second, ensure that proper rules and a code of conduct are in place to prevent any student lending program from crossing the line. Consistent with the College Loan Code of Conduct promulgated by the New York Attorney General, such a code should address, among other things, prohibitions on the following:

1) revenue sharing with lending institutions

2) gifts and trips provided by lenders to financial aid officers

3) compensation for serving on advisory boards of lenders

4) preferred lender lists skewed to favor those lenders who share revenue with the college

5) limiting students to those lenders on any preferred lender list

6) employees of lenders representing themselves as college employees

Finally, consult with counsel to be sure your institution is in compliance with all applicable state and federal regulations, and to be ready for any investigation of your institution’s practices in this area.

For more information, e-mail Gordon P. Katz or J.D. Smeallie at or, respectively, or call toll free, 1.888.688.8500.

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