The First Dominoes Fall

If the private student loan industry has resembled the Wild West in recent years, as more than one commentator has suggested, multiple politicians are running for sheriff. But on Monday, New York Attorney General Andrew M. Cuomo became the first to put actual notches in his belt.

Cuomo announced at a news conference (at high noon, to boot) that facing the threat of legal action, several universities had signed settlement agreements obligating them to repay funds they had received from lenders and to abide by a “code of conduct” that will require them to give up or change certain aspects of their relationships with student loan companies. And one of the student loan industry’s biggest players, Citibank, agreed that it too would abide by the code of conduct, and no longer offer to pay colleges a portion of their private loan volume to use for financial aid — a practice Cuomo had derided as “kickbacks.”

Under the agreements Cuomo announced Monday, Citibank agreed not only to abide by the code of conduct in all its dealings with colleges, but to create a $2 fund million fund, administered by the attorney general’s office, to “educate college-bound students about the student loan industry.”

And the following institutions agreed to repay to student borrowers money (a total of about $3.2 million) that lenders had paid them based on a portion of their loan business: Fordham ($13,840), Long Island ($2,435), New York ($1,394,563), St. John’s ($80,553) and Syracuse Universities ($164,085), and the University of Pennsylvania ($1,617,580). St. Lawrence University and the State University of New York also agreed to sign the code of conduct, although the latter’s institutions were not required to make any reimbursements or take other steps to comply with the attorney general’s settlement agreement, because they had not engaged in the practices Cuomo objects to.

“These schools and Citibank have made the responsible choice and are showing themselves to be industry leaders by being the first to take a major step in cleaning up a system laden with conflicts of interest,” Cuomo said. “We are beginning the process of restoring trust between universities and students and now is the time for other schools and lenders to step up and end the conflicts, perks and revenue sharing that have been costing students in New York and across the country dearly. These schools and Citibank are setting the example the entire industry should live by.”

As they have throughout the attorney general’s investigation, consumer groups applauded the latest moves. “Consumers Union commends Attorney General Cuomo for moving swiftly to stop unfair practices, secure compensation for students and their families and improve public oversight,” said Chuck Bell, programs director for Consumers Union, which publishes Consumer Reports magazine. “With the skyrocketing costs of college tuition, students and parents need fair play and straight information from universities and lenders. This code of conduct will transform the lending process, result in more affordable loans for students and their families and should be viewed as a model for widespread adoption by schools and lenders across the nation.”

Even as the institutions struck their deals with Cuomo, some of them made clear that they had done so under duress. John Beckman, a spokesman for New York University, said in an interview Monday that the university had settled Cuomo’s accusations that the university had failed to adequately disclose to students its revenue sharing agreement with Citibank because “it had no interest in further legal proceedings with the attorney general,” and that from “a cost standpoint,” the settlement made sense.

But reflecting the views of quite a lot of college administrators these days, Beckman said that NYU officials felt “great frustration” that the attorney general had besmirched the university’s reputation and made its relationship with Citibank seem like something it should be ashamed of.

“We used what could be said to be the best practices in choosing a preferred lender,” said Beckman. The university chose its private loan provider through a competitive process that Citibank clearly won by offering “the lowest rate for the greatest number of students,” even those with poor credit scores. After the university chose Citibank, he said, the lender offered access to a program in which it agreed to pay the university 0.25 percent of its private loan volume for NYU to use for need-based financial aid for its students.

“It was a source of frustration to use that they could not see this particular set of facts the way we did,” Beckman said, “and that they could not see that this other money is better used as financial aid for NYU than as Citibank profits.”

Officials at Penn, which was also accused by the attorney general of failing to make its revenue sharing agreement sufficiently transparent, made a similar point in a statement posted on the university’s Web site. Penn officials acknowledged that they had failed to disclose the arrangement clearly. But “[t]he CitiAssist program offered competitive rates and terms for our students at an interest rate equal to the prime rate or lower,” said Craig R. Carnaroli, its executive vice president. Still, “[t]o avoid any appearance of impropriety, the university has decided to settle the matter.”
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