Student Loan Industry Faces New Rules From Education Dept.

U.S. Education Secretary Margaret Spellings announced yesterday an overhaul of rules governing the student loan industry, including measures prohibiting lenders from offering schools gifts in exchange for business and a mandate that each university include at least three companies on its preferred lender list.

The new regulations, which will be released today and go into effect in July, were crafted in response to criticism that the department has not provided adequate oversight of the $85 billion-a-year industry.

Federal education officials also said the department has sent letters to 921 colleges and universities nationwide seeking details on their relationships with lenders. The letters, mailed in July, were sent to institutions at which more than 80 percent of loans are handled by a single lender. A second set of letters was sent to 55 schools and 23 lenders in October.

"Obviously we are continuing to work on oversight and monitoring issues," Spellings said in a conference call with reporters.

In recent months, federal and state investigations have found conflicts of interest among lenders, universities and government regulators. As a result of New York Attorney General Andrew M. Cuomo's far-reaching investigation of the industry, a dozen lenders have agreed to pay $13.7 million to the National Education Fund, which helps families navigate the loan process.

Congressional leaders and activists pushing for changes said that the rules announced by Spellings yesterday are a good step but that more needs to be done.

"The new regulations are largely consistent with the reforms the Senate passed earlier this year, and should help curtail inappropriate relationships between college and lenders that make federal student loans. But there's more to be done -- lenders who offer private student loans should also be covered by these rules," Sen. Edward M. Kennedy (D-Mass.) said in a statement.

Luke Swarthout, an advocate for the U.S. Public Interest Research Group Higher Education Project, agreed that tightening the rules is a positive step but said federal officials need to be "more aggressive watchdogs" over the industry.

The letters sent by the department Oct. 24 ask colleges to detail any agreements with lenders and provide a list of "school-affiliated individuals who were provided . . . stocks, warrants or other financial interest" by a lender.

Education officials said there are no allegations that the institutions or lenders have done anything improper. They have been directed to respond to the inquiry by Nov. 30.