The Education Department, criticised for lax oversight of student loans, released proposed rules yesterday that would set new standards for universities and ban lenders' marketing practices that have resulted, in some cases, in loan company payoffs to university officials.
The 225-page package represents a change in direction by the department, which for years had ignored calls by its inspector general, Democratic lawmakers and even some loan-industry officials for it to be more aggressive in policing the $85 billion student loan industry.
The rules would for the first time require universities to include at least three loan companies on any list of lenders they recommend to students and would ban many of the gifts and payments to financial aid officials that lenders have been offering to win student loan volume. The rules would bar everything from travel and entertainment expenses to providing staffing for college aid offices.
They would modify the existing framework, which applies only to federally guaranteed loans, "to strengthen and improve the administration of the loan programmes," the proposal states. The agency said the rules had been sent to the Federal Register for a 60-day comment period. If approved, they would take effect next summer.
Education Secretary Margaret Spellings created a task force in April to draw up the rules after an effort to win consensus on a similar package among representatives of students, lenders and academic institutions in a process known as "negotiated rule making" collapsed.
In the past few months, investigations in Congress and in the states, led by Attorney General Andrew M Cuomo of New York, turned up an array of undisclosed relationships between universities and lenders, and conflicts of interest on the part of aid administrators. Some university officials who were promoting particular lenders had received stock on favourable terms, consulting payments or gifts from loan companies.
Just this week, the Education Department's own inspector general reported to Congress that the department had made "minimal" progress in dealing with complaints about abuse in the nation's government-backed student loan programme.
Lenders by law have long been barred from offering inducements to gain loan applications. But what is an inducement is not entirely clear. In 2003, an assistant inspector general criticised the department for not giving any updated opinions about what kinds of incentives were barred since 1995, even though competition for loan business had escalated sharply since then.
Department officials have said in the past that they did not have the authority to oversee many of these practices because they involved private loans - those not guaranteed by the government. They had said they wanted aid administrators and the loan industry to police themselves.
The proposed regulations would still cover only federally guaranteed loans. They identify specific practices that would be barred, including "offering, directly or indirectly, any points, premiums, payments or other benefits to any school or other party to secure" student loan volume. Lenders who offer inducements run the risk of losing the federal guarantee on affected loans, under the proposal.
The rules would also ban a college's "access to a lender's other financial products, computer hardware, and payment of the cost of printing and distribution of college catalogues and other materials at less than market rate." They also make clear that lenders cannot try to get around them by offering benefits to "school-affiliated" groups, like alumni organisations.
In addition, they would require that a university's list of recommended or "preferred" lenders exclude any that provided incentives. Perhaps most importantly for students, universities would be required to explain how and why they recommend specific lenders and to ensure that all students, not just a few, receive the benefits offered by a lender on a preferred list.
In explaining the need for the regulations on inducements, the department stated that "this guidance, and the general requirements of the law, may no longer be generally known and understood by lenders and other participants" in the federally guaranteed loan programme, because the last guidance was provided in 1995. ---New York Times