U.S. Student Loan Office Gets New Rules and a New Chief

By Amit R. Paley
Washington Post Staff Writer
Saturday, June 2, 2007

The Bush administration, fending off criticism that it has failed to provide adequate oversight to the student loan industry, proposed regulations yesterday that would prohibit lenders from showering universities with gifts to drum up business.

The rules, announced by the Education Department, amount to the administration's strongest response so far to a nationwide investigation of the $85 billion-a-year business that has exposed financial ties among lenders, school officials and government regulators.

Also yesterday, Lawrence Warder, the department's chief financial officer, became the acting head of its student loan office, after Theresa S. Shaw resigned last month amid controversy. Earlier this week, the agency's inspector general said in a report to Congress that the loan office and the department "have taken only minimal steps to address our recommendations" to fix problems with student loan programs.

Some Democrats and consumer advocates said the department has taken too long to develop the rules, which would not take effect until at least July 2008. The agency killed a similar proposal in 2001 that had been drafted during the Clinton administration, and Congress is expected to pass stricter limits on the industry this summer.

"These rules are too little, too late," said Luke Swarthout, an advocate for the U.S. Public Interest Research Group Higher Education Project.

The proposed regulations emerged after Education Secretary Margaret Spellings initiated a rulemaking process last year. A committee charged with creating rules on lender gifts failed to reach consensus, which allowed the department to unilaterally draft the rules announced yesterday.

Katherine McLane, a department spokeswoman, said the process, although long and cumbersome, is the only way the agency can change policy. She said the department could not just wait and hope that Congress takes action.

"We are not resting on our laurels," she said. "We have to move forward."

The rules would prevent lenders from offering payments or other inducements to schools as a way to generate business. The proposal also requires schools that create lists of preferred lenders to put at least three companies on the lists and provide detailed explanations of how the lists were created.

In a preamble to the proposed regulations, the department used some of its starkest language to date in describing the crisis enveloping the loan industry. It said questionable business practices are "jeopardizing a borrower's right to choose a [private] lender and undermining the student financial aid administrator's role as an impartial and informed resource for students and parents."

The proposed rules also disclosed that recent agency investigations have found cases in which schools recommended a lender in exchange for prohibited inducements. McLane said she could not immediately provide more details.

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