Student Loan Giant Sallie Mae Settles in N.Y. Conflict-of-Interest Probe

Under the deal with New York Attorney General Andrew M. Cuomo, Sallie Mae will limit its relations with college financial aid officers and pay $2 million. (By David Karp -- Bloomberg News)

Sallie Mae, the nation's largest student loan provider, agreed yesterday to limit its frequently close relationships with university financial aid officials and pay $2 million to remove itself as a target of a widening national investigation into the industry.

In a settlement with the New York state attorney general, the Reston-based lending behemoth said it would no longer pay travel and entertainment fees for university officials, send its staff to work for free in financial aid offices or operate call centers where company employees provide financial advice but identify themselves only as university advisers.

The agreement was a watershed for an investigation that is spotlighting the often-hidden financial relationships among companies that make student loans, universities that receive the money and government officials who oversee the $85 billion-a-year industry. Together with a similar accord reached a week ago with Citibank, the nation's second-largest student lender, the deal effectively creates a national set of guidelines designed to limit conflicts of interest that could prevent students from getting objective financial aid advice from their schools.

New York Attorney General Andrew M. Cuomo thinks the market can be skewed by consulting deals, stock ownership and other perks that he and other critics view as kickbacks from lenders to college officials to drum up business. He described the settlements with Sallie Mae and Citibank as warnings to other student loan companies.

"We're saying to schools and lenders very clearly: We believe that these acts are wrong; they're unethical," Cuomo said in Manhattan. "The schools and lenders now have a choice: You can either settle with us, or we'll continue the investigation and we'll litigate."

Sallie Mae settled with Cuomo without admitting any wrongdoing and depicted its action as a positive. Under the agreement, its $2 million payment will go into a fund to educate college-bound students about financial aid.

"We are pleased that Attorney General Cuomo has recognized Sallie Mae's leadership in the student loan industry and our ethical market practices with students and schools," the company said in a statement. "Sallie Mae has cooperated with this inquiry since its inception, and, as the industry leader, we have been confident throughout that our policies and procedures would stand tall."

Sallie Mae, formally known as SLM Corp., manages $142 billion in student loans for almost 10 million customers and had been a major target for the attorney general.

Cuomo's investigation has roiled universities from coast to coast and heightened attention on an issue touching millions of students who need loans to pay rising tuition bills. Fordham University, Long Island University, New York University, St. John's University, Syracuse University and the University of Pennsylvania have agreed to pay a total of $3.3 million to students to settle allegations by Cuomo that they improperly received money from student loan companies.

Over the past week, the New York investigation has led to the suspension of financial aid directors at six universities, including Johns Hopkins, and an official at the U.S. Education Department. All had financial ties to a lender, Student Loan Xpress in San Diego.

Sallie Mae and Citibank have agreed to adopt a Student Loan Code of Conduct that forbids lenders from providing gifts to financial aid officials, bans companies from paying to be placed on "preferred lender lists," and forbids loan company staff from working in financial offices or operating a school's call center.

Several groups that advocate overhaul of the student loan industry said the measures do not go far enough.