Investigation underway in student loan scandal

By Nicole Osuch
May 3, 2007

Meghan Hurley

Financial aid offices around the country, including those at Drexel and Widener universities, have been charged with possible illegal and unethical practices. The attorney general of New York, Andrew Cuomo, said that college financial aid offices are recommending lenders based on kick-backs to the college or even personal bribes.

Banks and lenders, according to Cuomo, have offered universities money to use them as preferred lenders. Across the nation universities such as Indiana University, Pace University, Drexel University and University of Virginia are under investigation.

Cabrini College, according to Michael Colahan, the director of financial aid, does recommend two lenders, but chooses them based on their customer service and rates that they can offer students, not because of “financial gifts” from lenders.

The banks and lenders are charged with having resorted to illegal practices in order to fight back against the federal direct student loan program. The federal direct student loan program came about during the Clinton Administration as a way to make taking out loans less expensive to students by having the government provide students loans rather than private lenders. In fear of becoming shut out of the student loan market, banks and lenders have used questionable tactics in addition to offering student lower interest rates and fees to ensure business from universities.

According to the New York Times, the nation’s largest student lender, Sallie Mae, offered Indiana University $3 million that the university could use for “opportunity loans” if they left the direct loan program. Sallie Mae currently is the preferred lender at Indiana University.

In addition, according to Inside Higher Ed, New York’s attorney general plans to sue Drexel University for its student loan practices.

The student loan scandal has caused students to become weary of their college’s student loan practices. Krupa Desi, who will be a freshman at Drexel University in the fall and is currently going through the financial aid process, said, “Now that I know this I will probably look at other options and not solely rely on the financial aid office.”

Colahan said, “We tell students that these two banks, Edamerica and SunTrust are good but you can go with anyone you choose.”

The federal student loan industry is a $69 billion industry and practices like this have resulted in private lenders having more control of the industry. Private lenders claim that they are gaining more control of the industry based on the mere fact that they offer students lower interest rates and fees than the government. Colahan explained that as banks and lenders became more attractive to students by giving better interest rates and lesser fees that the direct loan became less desirable.

At some of the universities under investigation, it has been found that when students meet in the financial aid office to discuss taking out loans, they are actually talking to representatives from the banks and lenders, not university employees.

Colahan said that at Cabrini, Cabrini staff are students’ main contact for information but that they do provide students with Edamerica and SunTrust’s contact information.

“We have really picked our banks because we believe they are the best for you. I feel we are doing a fine job. We never allow ourselves to get comfortable with banks we use and we have never allowed banks to get comfortable with us. I wouldn’t be surprised if someone found a better deal and if so, good for them. Maybe we should consider that lender for next year,” said Colahan.

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Nicole Osuch

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