It's hard to decide what to make of the sections in the Higher Education Act reauthorization that target "pay for play" conflicts of interest in the student loan programs.
The legislation certainly takes some positive steps to safeguard students. It, for example, bars colleges from entering into revenue-sharing arrangements, in which colleges get a cut of each loan their students take out. Colleges are also forbidden from entering into "opportunity loan" deals with lenders -- arrangements in which loan companies waive or loosen credit requirements on private student loans in exchange for becoming the exclusive provider of Federal Family Education Loans (FFEL) on a campus.
The legislation also prohibits colleges from allowing lenders to staff their financial aid offices or to run the call centers that students depend upon to answer their questions about student aid. And it forbids schools from assigning first-time borrowers' federal loans to a particular lender through award packaging or other methods. This should put a stop to some colleges' particularly deceptive practice of providing pre-filled out master promissory notes to incoming students in order to shepherd them toward favored lenders.
In addition, the legislation requires colleges to include at least three unaffiliated lenders on their FFEL preferred lender lists, and two unaffiliated loan providers on their preferred lender lists for private loans. This provision will hopefully give students at least a modicum of choice in picking loan companies from which to borrow.
The bill's authors obviously made a good-faith effort to root out the worst abuses that are occurring. Unfortunately, they did not go far enough. The legislation leaves some extremely questionable practices in place and introduces significant new loopholes that lenders will undoubtedly try to exploit.
For example, the bill bans lenders from giving gifts to financial aid administrators that are worth more than a "de minimus amount." It continues, however, to allow loan providers to make philanthropic contributions to colleges, as long as the donations are not made in exchange for "any advantage related to education loans." While this exemption from the gift ban may seem reasonable, it puts federal regulators in the difficult position of having to assess lenders' motives in making gifts to schools.
In other words, the legislation continues to require the Department of Education to prove that there is a "quid pro quo relationship" between lenders' philanthropic contributions and the loans the schools' students obtain. This is not an easy standard of guilt to prove, and agency officials in recent years have been reluctant to pursue these types of cases without first being handed rock-solid evidence that wrongdoing has occurred.
We have previously argued for a full-fledged gift ban that would bar colleges from receiving any gifts or payments from lenders they recommend to their students or that make or hold a significant share of loans on their campuses. Colleges may not like the solution, but it seems a reasonable price to pay if they want to continue to be in the business of recommending lenders. And loan companies that wish to continue engaging in philanthropy can show their true altruistic spirit by contributing to schools where they don't have any business. Most importantly, establishing such a clear-cut standard would no longer allow the Department of Education to fall back on the claim that these cases are not worth pursuing because they are too hard to prove.
The reauthorization bill also restricts financial aid administrators from acting as consultants for loan companies. It does, however, allow other college officials to perform "paid or unpaid service on a board of directors of a lender, guarantor, or servicer of education loans." Making this distinction treats financial aid administrators as if they act in a vacuum, impervious to the influence of their superiors in deciding which lenders to recommend. This is certainly not the case. In fact, we have heard of plenty of cases in which college presidents and university chancellors have pressured aid officials to do business with lenders with whom they have ties.
Finally, the bill inexplicably weakens Department of Education restrictions that went into effect a month ago on the relationships between colleges and lenders. The Department's regulations prohibited colleges from allowing lenders to participate in the exit counseling sessions schools are required to conduct with college seniors. The legislation allows loan providers to continue to take part as long as college officials are in charge of the sessions and lenders don't use them to try and market their products and services. Similarly, while the Department banned aid administrators from serving on lender advisory boards, the bill allows them to continue to serve on these boards and be reimbursed by lenders for "reasonable expenses."
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