Biggest provider of student loans settles inquiry

The largest U.S. student loan company reached a settlement with New York’s attorney general Wednesday, and federal lawmakers called for further investigation of the widening scandal in the $85-billion-a-year industry.

SLM Corp., known as Sallie Mae, agreed to pay $2 million and end some of its practices, which Atty. Gen. Andrew Cuomo said were deceptive and unlawful. SLM will pay the $2 million into a fund that will educate students about financial aid.

Meanwhile in Washington, Sen. Edward M. Kennedy (D-Mass.) asked the Securities and Exchange Commission to investigate stock dealings of a CIT Group Inc. subsidiary, school financial aid officers who did business with the company and an official of the Education Department.

Cuomo said his investigation continued into other schools and lenders, including CIT Group’s Student Loan Xpress. SLM, the first to reach a settlement with New York, has agreed to cooperate with the probe.

“To the schools and lenders, you now have a choice: You can either settle with us or the investigation will continue,” Cuomo said.

New York, which began probing financial arrangements between loan firms and schools last year, said several student lenders paid kickbacks and offered perks to financial aid officers. In exchange, lenders wanted to be included on schools’ lists of preferred lenders.

Cuomo said these practices were not disclosed to students, who as a result might not get the best terms possible.

The lists are an important source of business for lenders, with 90% of students using a preferred lender, the attorney general said.

In the settlement, SLM denied having broken the law. “We’re happy to put this matter behind us,” SLM spokesman Tom Joyce said.

SLM said it did not take part in widespread “revenue-sharing” arrangements, which Cuomo called kickbacks. These are payments to schools based on the number of students who apply for loans.

The settlement said Sallie Mae provided clerical staff to financial aid offices, set up call centers that answered phones in the name of the school and funded trips for school officials, among other practices.

Last month, Cuomo set forth a code of conduct that prohibits lenders from providing anything of value to schools or their officials in exchange for special treatment. Lenders and schools must disclose any relationship they have.

SLM, which agreed to the code, will no longer staff financial aid offices and will provide full disclosure to students if it sells their loans to other companies, the settlement said.

Student advocates said the U.S. student loan system needed more sweeping reforms.

“More disclosure is fine, but this entire system requires overhaul so there’s real market competition and our resources go to providing students with the best benefits,” said Luke Swarthout, an education advocate with the U.S. Public Interest Research Group.