Clear Path to Corruption

Last fall, I appeared at a conference hosted by the American Enterprise Institute about financing higher education. I spoke about campus financial aid offices and ...
by | April 11, 2007

Last fall, I appeared at a conference hosted by the American Enterprise Institute about financing higher education. I spoke about campus financial aid offices and contributed a chapter to an AEI book that will come out in a few weeks.

One of the issues that I touched on was the politics of preferred lending. Most colleges choose one or two preferred lenders, giving 99 percent of their campus's business to Sallie Mae or Citibank or whomever. In exchange, students have simplicity in selection and are promised a better rate than if they'd been shopping on their own.

I'm sure that's how it works in most cases. But it was clear that preferred lending could lead to abuses. Private lending companies are not supposed to provide any inducements to college loan officers, but it's obvious that they do so on a routine basis. They are sort of like the drug reps you see pulling wheelie bags into every doctor's office, filled with samples and probably a free lunch for the staff.

The federal Department of Education cracked down on the worst abusers several years ago, but it still seems to be pretty routine for college loan offices to accept small favors from lending companies. People told me that these were largely along the lines of ballpoint pens, bagels and extra staffing help. But given that a single campus might generate upwards of $150 million in loan business per year, clearly there are incentives for lending companies to do whatever they can to score a good share of the business.

That's the context in which I've been reading articles in recent weeks about New York Attorney General Andrew Cuomo's (3rd item) pursuit of corruption in preferred lending practices. (Senator Ted Kennedy is running a parallel investigation.)

The Washington Post reports that Cuomo's office has named three schools where financial aid officers took cash payments from Student Loan Xpress. At Johns Hopkins, financial aid director Ellen Fishberg has received more than $65,000 and put Student Loan Xpress on the preferred lender list, directing more than 40 percent of the university's loan business to the company over the past four years. Fishberg has been put on leave.

My guess is that more such stories will emerge. In the end, perhaps only a tiny fraction of financial aid offices will be implicated. But the temptation has always been there. These offices necessarily have chummy relations with lending companies. I'll be fascinated to watch what regulations are implemented to try to prevent clear cases of corruption.

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