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

"This is a Band-Aid when we really need congressional reform that gets at the disease," said Luke Swarthout, an advocate for the U.S. Public Interest Research Group Higher Education Project. "The oversight of the federal student loan program is coming out of Albany, New York. Which raises the question: Where is Washington, D.C., on this issue?"

Congressional Democrats, who are conducting inquiries, have recently proposed legislation to outlaw many of the monetary relationships between lenders and university financial aid offices.

"This is a national problem, and we must adopt a nationwide solution to stop this pervasive problem in the student loan industry," Sen. Edward M. Kennedy (D-Mass.), chairman of the education committee, said in a statement.

Cuomo's investigation provided a rare glimpse into the financial ties between Sallie Mae and universities. According to a senior attorney in Cuomo's office, Sallie Mae has paid for scores of financial aid administrators to attend free training sessions in Florida that were essentially junkets.

"They say it's training, but the financial aid officers get there and head right to the beach," said the lawyer, who spoke on condition of anonymity because he was not authorized to discuss the investigation publicly.

Sallie Mae also operated a call center for about 20 schools -- including Seton Hall University, Pace University and Mercy College -- where the company's employees usually identified themselves as school staff, the lawyer said.

"How can that employee of the lending organization possibly be providing objective information when they actively work for a lender?" Cuomo said.

Tom Joyce, a spokesman for Sallie Mae, said the calls were fielded at a company facility in Killeen, Tex., but he declined to list schools that used the center. As part of the settlement, he said, the company will stop its call center service within 18 months.

The agreement also forbids the company from paying travel or hotel expenses for the 25 or so financial aid administrators who sit on Sallie Mae's advisory board. Joyce declined to identify them. He said the lender pays for their trips to three day-and-a-half-long meetings a year, which were recently held in Boston and Chicago. "It's a relatively low-key and modest working event," he said.

Recently, Democrats on Capitol Hill have raised questions about Sallie Mae Chairman Albert L. Lord's sale of $18.3 million worth of company stock just before President Bush proposed a major cut in lending industry subsidies that caused Sallie Mae shares to nosedive. Joyce has called the timing "completely coincidental." The Securities and Exchange Commission is examining the transaction, according to two government officials who spoke on condition of anonymity because of the matter's sensitivity.

Analysts said yesterday's settlement was unlikely to affect the company's fiscal health. Friedman, Billings, Ramsey Group, an Arlington-based investment bank, urged investors to buy Sallie Mae stock yesterday in a report titled "The Scandal That Never Was."

"When all the dust settles, I think there is a strong case to be made that this is a positive for the company," said Matt Snowling, an analyst who co-wrote the report. "This investigation may weed out some of the bad players and create a better playing field for Sallie Mae."

Paley reported from Washington, Tse from New York. Staff writer Carrie Johnson contributed to this report.