House Backs New Reins On Student Lenders

By Amit R. Paley
Washington Post Staff Writer
Thursday, May 10, 2007

The House voted overwhelmingly yesterday to bar student loan companies from offering perks and financial incentives to universities to drum up business, the first federal legislative response this year to mounting criticism of the $85 billion-a-year industry.

The bipartisan bill, approved by a 413 to 3 vote, would increase federal regulation of student loan companies. The industry has come under scrutiny from federal and state investigators over its financial ties with schools and government officials.

The measure drew support from advocates of students and from some key players in the loan industry -- a rare overlap of views for the interest groups.

"This legislation would protect students and families from the corrupt practices and abuses that for too long have been allowed to run rampant within the student loan industry," said Rep. George Miller (D-Calif.), chairman of the House education committee and the bill's lead sponsor.

The Senate is likely to approve a similar measure soon, congressional aides said. The Bush administration is "generally supportive" of the legislation, said spokesman Scott Stanzel.

Passage of the bill, the Student Loan Sunshine Act, came as Education Secretary Margaret Spellings prepared to face questions today from Miller's committee over the student loan controversy and other matters. Critics say the administration has been lax in its oversight of the industry, a charge Spellings rejects.

The bipartisan support for tighter control of the industry reflects the growing political potency of the issue since an investigation by New York Attorney General Andrew M. Cuomo revealed alleged conflicts of interest among university financial aid officers and questionable business practices by lenders. The nation's four largest lending companies and 22 schools have agreed to abide by a code of conduct, developed by Cuomo's office, that bans many of the most controversial practices.

The legislation passed by the House would forbid lenders to offer gifts to financial aid officials, to provide staff members for school financial aid offices or to pay schools for steering student business their way. The measure also would require schools to disclose financial relationships with loan companies.

An industry trade group, America's Student Loan Providers, issued a statement endorsing the legislation's core principles. Kevin Bruns, the group's executive director, said the rules would "help guide student loan marketing so that questionable practices are eliminated."

But some in the industry said they were worried that parts of the bill go too far. Shelly Repp, general counsel for the National Council of Higher Education Loan Programs, said a portion of the bill that would prohibit university officials from sitting on lender advisory councils would make it difficult for loan companies to get advice from schools.

Proponents said the legislation would increase the transparency of the student loan system, giving students better information for borrowing decisions that can affect their finances long after they graduate.

Several lawmakers and student advocates, though, said the legislation did not address what they see as the biggest problem: the billions of dollars a year in federal subsidies given to private lenders instead of students.

President Bush has proposed a major cut in subsidies, and Congress might slash them further. Some lawmakers hope any money saved will be used to increase aid for needy students.

"The real test of our resolve will be whether we settle for yet another band-aid on a broken system," said Rep. Tom Petri (R-Wis.), "or if we work to redesign this system to ensure that critical tax dollars in federal student loans provide the best return on the taxpayers' investment."

Some universities also fear that the bill might unintentionally hurt low-income students. Harris Miller, president of the Career College Association, which represents for-profit schools, said loan companies often agree to provide loans to poor students if the companies are included on a school's list of preferred lenders. But he said the legislation might consider such an arrangement an illegal gift.

Also yesterday, Miller announced that his investigators had found that J.P. Morgan Chase, the nation's third-largest student lender, had hired officials at five schools. Investigators also found that the lender spent more than $70,000 to take 200 university aid officers on a harbor cruise in New York City in 2005.

Miller and others on his committee are expected to question Spellings today about the Education Department's oversight of student loan programs. One official was suspended last month after revelations that he held more than $100,000 worth of stock in a loan company while helping to oversee the industry. This week, the head of the department's student loan office announced her resignation.

Lawmakers also have criticized the department for security lapses involving a database with confidential information on tens of millions of students; for not establishing rules to restrict gifts from lenders to schools; and for allowing a lending company to reap hundreds of millions of dollars in subsidies through an accounting loophole.

Spellings intends to point out the department's extensive oversight activities in a forceful response to critics, said her chief of staff, David Dunn.

"She has been probably the most activist secretary on higher education issues ever," Dunn said. "Secretary Spellings is very positive and upbeat and really looking forward to the opportunity to tell her story and set the record straight."

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