It's been nine months since we last heard from New York Attorney General Andrew Cuomo on student loan issues, but his return to the scene this week could not be more welcome. In reaching a new round of settlements with student loan companies, he once again demonstrated his willingness to step in when federal regulators fail to do their jobs.
On Tuesday, Cuomo announced that he had reached settlements with seven student loan companies that he found to have engaged in deceptive and misleading practices while marketing consolidation and private student loans directly to students. The companies -- EduCap (also known as Loan to Learn), Nelnet, Campus Door, GMAC Bank, Graduate Loan Associates, NextStudent, and Xanthus Financial Services -- agreed to abide by a code of conduct banning unscrupulous practices and donate $1.4 million to the fund Cuomo has established to help educate students and their parents about financial aid. An eighth lender, MyRichUncle, adopted the code voluntarily, even though Cuomo had not raised concerns about the company's conduct.
Last year, while testifying before the House Committee on Education and Labor about sweetheart deals between colleges and lenders, Cuomo made a statement that is as true today as it was then. "The practices we have uncovered were not undiscoverable until now," he said." Rather, the entity charged with maintaining the integrity of the student loan market failed."
You can say that again.
For years, students and college aid administrators have complained to the Department of Education about solicitation letters prospective borrowers were receiving from lenders that were designed to look like they came from the federal government. [For example, one such letter from Goal Financial, a student loan consolidation company that Cuomo is suing for refusing to alter its practices, had the following heading: "Notice of Congressional Action: Failure to respond could result in limitations to your rights...and may expose you to federal rate increases." (The Chronicle of Higher Education, June 2006)] But yet, neither the Department nor any other federal regulatory agency, such as the Federal Trade Commission, has penalized any lenders for engaging in this practice.
Similarly aid administrators have repeatedly complained to the Department about student loan offers made to borrowers promising immediate cash rebates or other financial incentives in exchange for their business. Still, federal officials did not push offenders despite the fact that these practices clearly violate the Higher Education Act's prohibition against lenders providing illegal inducements to students.
In contrast, Cuomo's new code of conduct would bar these practices. It would also prohibit direct-to-consumer loan providers from:
- Providing inducements to students, such as gift cards, iPods, and Global Positioning System (GPS) devices to entice them to take out loans.
- Offering payments or other inducements to students to get them to convince their friends to take out loans from the lenders.
- Making false and misleading representations as to the advantages of taking out private loans over lower-cost federal loans.
- Advertising low rates or favorable terms that are available only to a tiny fraction of borrowers without disclosing that fact.
- Failing to guarantee that advertised borrower benefits, such as interest rate discounts for on-time payments, will be honored even if loans are sold to other companies.
Loan industry officials and their allies in the financial-aid world love to diminish Cuomo's accomplishments. Despite plenty of evidence to the contrary, they have questioned whether any students have been hurt by the unethical practices that Cuomo has helped expose. They have also waged a campaign to persuade the Bush Administration and Congress to handcuff Cuomo and his fellow state attorney generals by preempting their authority to take actions against student loan providers and financial-aid administrators.
But these attacks on Cuomo are entirely self-serving and completely miss the point. "What Cuomo's investigation undeniably did," as Inside Higher Ed put it so well yesterday, was that it forced federal lawmakers to recognize the dire need for stricter regulation of a private student loan market "that has expanded widely, virtually unfettered by federal oversight," and left financially-needy students prey to predatory lending practices. Congress took a first step in this direction when it reauthorized the Higher Education Act this summer. And while the provisions are far from perfect, they do add significant protections for borrowers.
In the absence of any federal leadership on these issues until now, students have been very lucky to have had Cuomo in their corner. That's why we at Higher Ed Watch believe that any effort to diminish his influence, and that of other state attorney generals, by preempting their authority over student loans is misguided and should be fiercely resisted.