Teaching the Student Loan Industry a Lesson

This is the VOA Special English Economics Report.

Imagine this: An official in a position of trust helps you choose a company for a service important to your future. You expect that the advice will be in your best interest.

What you do not know is that the person's office has a financial relationship with that company. The official may have received gifts likes trips or stock options, or money for professional advice.

Would you wonder, then, just whose interest was being served?

This is what some American states are investigating in connection with the student loan industry. They are examining possible conflicts of interest when schools direct students to lists of so-called preferred lenders.

New York Attorney General Andrew Cuomo says colleges and universities often fail to tell about their ties to banks and other finance companies. His office has already settled cases including with two big lenders.

Sallie Mae, the nation's biggest education lender, agreed to pay two million dollars. And Education Finance Partners agreed to pay two and one-half million. Neither of them admitted any wrongdoing. The money will go to educate students about loans.

In some cases, when students call a school for loan advice, they talk to a lending company employee. But they are not always told that.

Andrew Cuomo wants financial aid offices and lenders to follow a set of rules, a College Loan Code of Conduct. These would end financial ties between lenders and schools, including gifts and trips.

At the same time, lawmakers are seeking changes in the student loan system. Mister Cuomo was at a hearing Wednesday in the House of Representatives. He criticized the Department of Education for not doing enough to control the student loan industry.

A day earlier, Education Secretary Margaret Spellings announced a committee to study federal student loan programs. And last week, her department temporarily restricted the use of a national system of financial records on millions of students. She said officials were concerned about an increase in usage of that government database by lenders and other companies.

In another development, Sallie Mae, officially the SLM Corporation, has agreed to a buyout offer. Two banks and two private equity companies are offering shareholders twenty-five billion dollars. The deal is unusual. Loan companies generally do not produce enough profit to finance a sale based largely on borrowed money.

And that's the VOA Special English Economics Report, by Mario Ritter. I'm Steve Ember.