State passes laws to protect students from lending abuse

Legislation follows investigation of revenue sharing agreement

NICK DHIMITRI
Special to The Leader

A new piece of legislation passed this summer by the New York State Assembly is the first law specifically designed to protect students and their families from abuses and conflicts of interest in the student loan industry.

The Student Lending Accountability, Transparency and Enforcement (SLATE) act is a result of New York State Attorney General Andrew Cuomo's investigation into the student loan industry. Since February it was revealed that a number of financial aid directors had been involved in revenue sharing agreements with banks and lenders.

After issuing subpoenas to more than 50 colleges and universities since February, the Office of the Attorney General (OAG) found that banks and lenders such as Citibank and Sallie Mae had been offering kickbacks to financial aid directors in exchange for a spot on the university's preferred lenders list. This is a list of recommended lenders presented to students by the college's financial aid office.

"Students should be able to trust their university," said Charles Telly, a business professor who teaches a course in business law at Fredonia.

Daniel Tramuta, associate vice president of Enrollment Services at Fredonia, said that the new legislation gives him an avenue to report companies that come to him with "enticing" offers. A company once offered him a trip to the Caribbean to stay in a resort and attend a conference as part of a paid advisory board, which he felt was unethical, and reported it to the Human Resources department.

"Dan absolutely did the right thing," said Michael Daley, director of Human Resources Management. "I can't remember the exact date, but this was well before Cuomo's investigation. Fredonia is held in very high regard among the state ethics commission."

Daley's job description on the Fredonia home page includes "ethics reporting." He said that in the past, Fredonia employees have been approached by people from companies offering Sabres tickets, invitations to golf tournaments and cash gifts in attempt to facilitate business deals, all which which were long viewed as unethical.

While Fredonia does provide a recommended lender list, it follows both the Code of Conduct and the SLATE Act guidelines when determining which lenders to place on that list, Tramuta said. The top of Fredonia's recommended lenders list reads, "As a borrower, you should know that you have the right and ability to select the lender of your choice regardless of the recommended lender list referenced below."

"I looked at all my options and all the benefits provided and at the end of the day the ones recommended by Fredonia provided the best benefits," said Belinda Taylor, junior political science major.

Cuomo's second round of subpoenas handed down on Thursday Oct. 11 investigates direct lending companies who use misleading or deceptive tactics to attract students. A review of some of the measures used by lenders revealed misleading advertisements.

For example, the company LendingTree.com used the message, "When banks compete, you win" to attract students. An investigation into their Web site revealed that LendingTree.com was funneling almost all of its student loans through a single lender. LendingTree.com did not disclose to borrowers that it had signed an exclusive agreement with the lending company EduCap to essentially offer only EduCap loans.

Further investigation revealed that companies like Academic Loan Group mailed fake checks valued up to $2,406.50 to students to entice them to call its toll free number.

Cuomo's investigation has lead to other changes in lending laws nationwide, namely the passage of the College Cost Reduction and Access Act of 2007 (H.R. 2669) which will cut over $20 billion in federal subsidies to lenders over the next five years. From the $20 billion, $11.4 billion will be used to increase the Pell grants (basic federal grants) for middle and low income students. The maximum amount for a Pell grant will increase from $4,310 to $5,400 along the same five-year period.

In addition, the new law will reduce Stafford loan interest rates from the current 6.8 percent to 3.4 percent by July 2011. "The reality is that our bill restores balance to this grossly unfair student loan system by directing funds to the students, not to the banks," said Sen. Edward Kennedy(D-MA), according to a Sept. 9 article in The New York Times. Although the reduction in interest rates is being touted as a victory by student advocates, some predict that the cut in federal subsidies could have crippling effects on the student loan industry. In the same article, Rep. John Boehner (R-OH) said the cuts to subsidies, "will cripple the private sector loan program."

"The cost of doing business is going up," Tramuta said. "Lenders will not be able to give students the benefits they were giving them before." The changes in the lending subsidies have had an immediate impact on the private loan industry, "I have already had three lenders tell me they anticipate the student benefits they offer going down." Tramuta said that he predicts things like the zero-percent origination fee which lenders have offered students in the past will "begin to disappear."

The increased funding for Pell grants that Kennedy supported will benefit roughly one-third of the Fredonia campus who are currently receiving Pell. Tramuta said that while any increase in Pell is a positive thing, raising the maximum Pell grant to $5,400 will only help the "roughly 300 students on campus receiving the maximum level."

Critics from both sides continue to debate how the College Cost and Reduction Act Student lending is an $85 billion-a-year student loan industry. According to the Sept. 9 article, Kennedy's statement that the legislation will "help millions of students achieve the American dream," was rebuked by Joe Belew, president of the Consumer Bankers Association, who said the new law will "come to be viewed as irresponsible legislation that undermined rather than expanded college opportunity."