Tuesday, June 5, 2007
Yara Zakharia, Esq.
After swallowing the bitter pill of criticism over its lax regulation of the student loan industry, the Department of Education decided yesterday to roll up its sleeves and take care of business. It issued proposed rules aimed at establishing new guidelines for colleges and prohibiting lending institutions' marketing schemes that have involved, in some instances, loan company kickbacks to college administrators.
The Department's 225-page proposal evidences an important ideological shift, considering its apparent complacency when pressed by Democratic legislators and its own Inspector General to monitor more aggressively the $85-billion strong educational loan industry.
Under the proposal, colleges will be required to include, at minimum, three loan institutions on any lender list they provide students, and many of the financial inducements and gifts that lending institutions offer financial aid representatives for purposes of boosting student loan volume would be prohibited. Expenditures relating to travel and entertainment, as well as the furnishing of staff for financial aid offices, would be banned under the rules expected to take effect in the summer of 2008.
For a long time, creditors were barred from extending financial incentives in exchange for loan applications. What constitutes an inducement, however, is a bit blurry. An Assistant Inspector General rebuked the department in 2003 for failing to hand down a current opinion on the types of incentives held to be unlawful since 1995, despite the fact that competition in the school loan industry had significantly risen since then.
There appears to be very little opposition to the proposed rules. The Consumer Bankers Association (CBA) stated that it would request only a few amendments, especially in view of the fact that Congress is already paving the way for even tighter regulations. CBA special counsel John Dean commented, “I think that you’ll have a series of largely technical comments.” Lenders, he noted, “have come to embrace the inevitability of reform and in many cases welcome it.”
The trade organization that represents university financial aid employees agreed last week to prohibit its members from accepting money and gifts and lenders from sponsoring its meetings.
Democrats in both houses of Congress, as well as New York Attorney General Andrew M. Cuomo, who have pushed for student loan legislation, reacted with cautious optimism and blamed the Department of Education for not implementing remedial measures sooner. “It has taken far too long for the Department of Education to act,” Cuomo noted. He also considered that that there was "a gaping hole in the regulations" since the new rules would not require that preferred lending institutions be chosen strictly on what is in the borrowers' best interests.
Robert Shireman, head of the Institute for College Access and Success and a Clinton administration college policy advisor, explained that the proposed rules carved out an exception for philanthropic gifts by lenders to colleges that are not visibly aimed at pumping up loan volume. “There can be the same kind of wink and nod that occurs around campaign contributions,” he indicated, adding that some of Congress' recommendations are much tougher.
