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

By Amit R. Paley and Tomoeh Murakami Tse
Washington Post Staff Writers
Thursday, April 12, 2007

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.

"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.

View all comments that have been posted about this article.

© 2007 The Washington Post Company