He found, for example, that one loan company, American Student Loans Services, used an American eagle on its documents and pretended to be a federal agency. Sallie Mae went out of its way to hoodwink parents and students into thinking it was still a federal agency and not a for-profit company that actually competed with the federal loan program. Other companies, Cuomo said, were using “misleading and harmful tactics” in their marketing practices. But as Collinge pointed out later, “Students tend to sign nearly anything their universities put in front of them in order to get registered for class” and few have the luxury of hiring a lawyer to examine the applications. Students, unaware of the new cash-for-diploma mode of college administration, thought that the universities were on their side when they recommended lenders on their preferred lender lists. After graduation, when they were financially ruined by huge loan payments, it was too late to read the fine print.
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David Charlow, director of financial aid for Columbia University, was dismissed by the college in 2007 after documents released by Cuomo showed that he had sent letters to parents and alumni praising a student loan company, Student Loan Xpress, in which he had a personal financial interest. Ellen Frishberg, financial aid director at Johns Hopkins University, resigned after Cuomo found she had received $65,000 in consulting fees and tuition payments from Student Loan Xpress.
“While our investigation has uncovered many dirty secrets of the college loan industry,” Cuomo said, “the stock and money that Student Loan Xpress funneled to Charlow and Frishberg were among the most flagrant. At times, it seems that Charlow and Frishberg were working more for Student Loan Xpress than for their universities.”
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Charlow had been on leave since April when it was disclosed that he owned $100,000 or more in shares of Education Lending Group, the parent company of Student Loan Xpress. Immediately after receiving the stock, Cuomo said, Charlow had placed Student Loan Xpress on Columbia’s list of preferred lenders. In a letter to parents in 2004, Charlow praised Student Loan Xpress and urged parents to refinance their student loans with the company. At the same time, he accepted tickets to rock concerts and sporting events from the company.
During the same week, Lawrence W. Burt, the financial aid director of the University of Texas at Austin, was fired after he was found to hold 1,500 shares of Student Loan Xpress and had placed the organization on the university’s preferred list. Among the favors he had received from student loan lenders were annual luncheons for his staff, paid golf vacations, tickets to sporting events, and tequila.
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Colleges also sold to the loan companies the rights to use the college’s colors, insignia, and mascot on their promotional materials so that they looked like they were coming from the colleges. “When lenders use deceptive techniques to advertise their loans, they are playing a dangerous game with the student’s future,” Cuomo said. “Student loan companies incorporate school insignia and colors into advertisements because they know students are more likely to trust a lender if its loan appears to be approved by the college. We cannot allow lenders to exploit this trust with deceptive, co-branded marketing. A student loan is a very serious financial commitment, and choosing the wrong loan can lead to devastating consequences.”
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Among those caught with their hands in the cookie jar in 2007 were representatives of some of the top American universities, but it was clear that the practice was even more widespread than reported, affecting hundreds of schools across the nation. At my college, the preferred lending list was posted on the college’s website but was removed only a few hours after one of my students, a reporter from the student newspaper, inquired about it.
Many observers of the scandal, however, including former Labor Secretary Robert Reich, thought that what Cuomo had exposed was only “the tip of the iceberg,” and that many more colleges were involved in the scandal in many more complicated ways. “By 2000,” wrote Collinge, “it became apparent that some schools had all but abandoned even the pretense of concern for students’ financial well-being and were entering into agreements with lenders for the purpose of making additional money from students, over and above the loan income that was being paid to them for the cost of attendance.”
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Eventually Cuomo and the lenders reached a settlement. The lenders adopted the College Loan Code of Conduct and paid $9.5 million to a fund dedicated to educating future college students about their loan choices. What the scandal left behind, however, was a handful of college student financial aid officers who were forced to resign and, of course, surrender what little was left of higher education’s integrity. If Diplomas Inc. could rip off their own students for personal gain, why should parents trust them to care for their children for four to six years?
The U.S. Senate conducted its own investigation during the summer of 2007 and found that universities had been using their preferred lender lists as bargaining chips, selling them to whichever loan company offered them the best deal.
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Collinge, who feels that the depth of the loan scandal will probably never be known, points out that there are 1,412 colleges where 80 percent or more of the student loans came from one lender and that of these, 531 were found to have 100 percent of their loans from a single lender, which is, of course, the “preferred” lender, even if it is not official.
“The fact that so many institutions are funneling all, or nearly all, of their students toward a single lender is clear evidence that the students had, for all intents and purposes, no choice in their lenders,” he said.
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The 2010 legislation was aimed at reforming most of these abuses. Federal student loans will now come directly from the government, bypassing the predatory banks, and the law will limit students’ minimum payments to just ten percent of their incomes. Pell grant increases mean students also won’t have to take out as many loans. However, the law does nothing to hold down the rapidly increasing cost of college tuition, so students will still have to go deeply into debt in order to pay for higher education.
Selling Out to Credit Card Companies
At the same time the student loan scandal was being discussed in Congress in the fall of 2007,
BusinessWeek
published a three-part series on an entirely separate financial scandal in which party school administrators were selling the names and addresses of their students to credit card companies to be targeted for advertising.
“Nearly every major university in the country has a multi-million-dollar affinity relationship with a credit card company,” wrote reporter Jessica Silver-Greenberg. “The deals can be worth nearly $20 million to a single university . . . and, in most cases, the worse the card terms are for students and alumni, the more profitable they are for the schools.”
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Armed with the names and addresses of students provided by school administrators, credit card companies bombard students with marketing promotions, sometimes several per week in a relentless mailbox bomb. Also, for an additional fee, colleges allow credit card companies to set up tables in the student center where students hired as sales staff make $5 to $10 for each application a student fills out. In return for filling out the form, students get free T-shirts, pizza, Frisbees, or candy bars. Given that most students are habitually strapped for cash, the offer of instant money is a temptation few students find easy to resist, especially if the card comes with the university’s logo or mascot on it. Thousands of students signed on the dotted line for a high interest rate and used the cards to buy beer and pizza and finance their spring break vacations in Cancun.
Tamara Draut, author of
Strapped
, said colleges referred to the students who worked at the tables as “credit card pushers” and they were taught to use some high-pressure sales tactics. They offered the cards just before spring break as a way to pay for exotic vacations and told students not to worry because it would be easy to pay back the money once they snared a high-paying job after graduation. About 25 percent of students use their credit cards to pay tuition, she said. “Visa and MasterCard have no doubt funded a great many pizzas, kegs, and spring breaks,” she said, all at 23 percent interest.
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BusinessWeek
found that the deals were bringing in big bucks from the credit card companies: $16.5 million at the University of Tennessee, $14 million at the University of Michigan, $14 million at Michigan State University, and $13 million at the University of Oklahoma.
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Although the colleges tend to shroud these agreements in secrecy,
BusinessWeek
was able to determine that the Bank of America alone had 900 of these affinity agreements with American colleges and Chase had an additional forty. They pay royalties to the colleges for the contract and a set fee for each student who signs up for a card. “Schools don’t want the public to see money made on these deals and so they broker the contracts through incorporated entities,” said Robert Manning, director of the Center for Consumer Financial Services at the Rochester Institute of Technology. “There is so much of this money unaccounted for.”
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Irene Leech, an associate professor at Virginia Tech who bothered to read the fine print on the contract for a student credit card, was shocked at what she found. “Students assume that if the university has an affinity contract with a bank to offer a credit card, the university will surely look after them,” she said. “But these contracts are really money makers for the school, and not about services to the students.”
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And students end up paying the price.
About 75 percent of college students have credit cards, up from 67 percent in 1998. Before that, most students did not have cards because federal law required parents to cosign the agreements. The bills can quickly reach staggering levels when the credit card companies offer lines of credit of up to $10,000 to someone who does not even have a job. If they miss a payment or two, the interest rates can shoot up to 30 percent or more. By graduation, the average student has racked up $3,000 to $5,000 in credit card debt.
The New Hampshire Higher Education Assistance Foundation found that many college graduates were falling behind in paying off their credit card debt. In a report called “Clothed, Fed and Over their Heads?” it was revealed that recent graduates were forced to choose between making the payments on their student loans or their credit cards. The average student was carrying $3,300 in credit card debt that would take eleven years to pay off at the minimum monthly payment. Students who were also paying off student loans were carrying an average credit card debt of $4,500.
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The delinquency rates show that students really don’t consider the consequences of their credit card debt. The results can be low credit ratings that prevent graduates from renting an apartment or buying a home. The New Hampshire study found that 21 percent of college freshmen were at least four months behind in their payments and that 42 percent of students had at least six open credit cards.
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Consumer groups say that colleges, instead of pushing students into the hands of credit card companies, should ban them from campuses in the best interest of students. “The companies should not be targeting a population who are not in a position to handle credit wisely,” said Travis Plunkett of the Consumer Federation of America.
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In February 2010, a new federal law went into effect protecting students from credit card abuses by their colleges. Students under the age of 21 are no longer permitted to apply for credit cards. Colleges are prohibited from peddling the cards on campus and anywhere near the campus and are no longer allowed to give out free gifts to applicants.
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Thankfully, this is one way colleges won’t be able to exploit their students in the future, unless they can find a loophole in the law.
Study Abroad Scams
Party school administrators don’t need the assistance of student lending firms and credit card companies to fleece their students systematically. Even an innocuous-sounding program like “Study Abroad” provides ample opportunities to part students from their cash.
This scam first came to light when Jennifer Bombasaro-Brady, a student at Wheaton College in Massachusetts, returned from a study abroad semester in South Africa and complained that she had been forced to pay full tuition, room, and board at the Wheaton campus, even though she had not been there all semester. The program she attended in Africa actually cost $4,439 less than her Wheaton bill. “I was living in a place with no heat, no hot water, no electricity and no internet and paying the cost of my dorm room here,” she said. Her father, attorney James Brady, filed a lawsuit in Massachusetts state court complaining that the college’s pocketing of the difference in cost was a deceptive practice.
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