College Loan Programs That Flunk Ethics

We've known for years about the "iron triangle" of college finance, the alliance among universities, lenders and federal education officials that seeks to constantly expand the college loan program. But it is only now that we are learning about the myriad of ethically questionable practices that have held the triangle together.

Let's start with the fees or special lending facilities that student loan originators offer to college financial aid offices for designating them as "preferred providers" or sending them a certain volume of business. And the call centers to advise students and parents on tuition financing options that appear to be run by the college but in fact are run by the lenders.

Of course, because you wouldn't want college loan officers to be unfamiliar with the products they are recommending, the lenders were generous enough to pay their way to conferences and seminars where they were wined and dined and entertained. And from there, it was only an ethical hop and a skip to paying consulting fees, paying tuition for graduate courses taken by college financial aid officers, or inviting university officials to serve on the lender's board of directors. Some of those officers were so impressed that they decided to buy stock in the lenders whose services they were recommending.

The federal government, of course, has rules about such conflicts of interest, like requiring its employees to disclose financial holdings annually. But we learned last week that even when officials fill out those forms and disclose how much they have profited by investing in the student loan industry they are ostensibly supposed to regulate, nothing happened because nobody bothered to read them.

Out in Reston, our own Sallie Mae has agreed to pay $2 million and end several questionable marketing practices to settle its part of an industry-wide investigation by New York's attorney general. Its statement announcing the deal last week was a model of Orwellian spin:

"We are pleased that Attorney General Cuomo has recognized Sallie Mae's leadership in the student loan industry and our ethical market practices. . . . 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."

Tall enough, anyway, for the Blackstone Group to consider offering $20 billion for Sallie, even before Congress completes it own investigation of the industry and rewrites the rules on college lending.