Coming Clean on Student Loans

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The University of Southern California campus.

The goal is certainly worthy, but some of the practices of student-loan firms are anything but. For instance, how about manning a college's financial-aid hotline with employees of a lender that is vying for the callers' business? Sallie Mae, the nation's largest student loan company, used to do such things, but apparently no more. The company agreed Wednesday to abide by a code of conduct, devised by New York State attorney general Andrew Cuomo, that prohibits lenders from giving universities "anything of value," including call-center staffing.

With Congress and at least two states investigating questionable relationships between colleges and lenders, Citibank this month became the first student loan provider to adopt this code of conduct, which also expressly bans revenue-sharing arrangements in which lenders route a percentage of student-loan revenue back to the schools that steered them the business. Cuomo announced last month his intention to sue Education Finance Partners for paying schools to include it on their list of preferred lenders. Since then, several universities have agreed to adhere to Cuomo's code and also to reimburse students nearly $3.3 million gleaned from revenue-sharing.

A Sallie Mae spokesman told TIME that although his company had been approached by several institutions in recent years about starting revenue-sharing deals, it declined to engage in this activity. "No schools are being asked to return money as a result of their relationship with Sallie Mae," the company said in a statement released Wednesday. However, Sallie Mae and Citibank have agreed to contribute $2 million apiece to a new fund administered by Cuomo's office to educate college-bound students about their loan options.

Cuomo's code of conduct also bans gifts or trips from lenders to university employees. After allegations surfaced this month that Student Loan Xpress had given stock grants or paid consulting fees to financial-aid officers at six schools who were recommending the lender to their students, those employees were placed on leave pending internal investigations. Likewise, a senior manager at the Department of Education was suspended for allegedly holding stock in the parent company of Student Loan Xpress while he oversaw lenders in the federal student loan program.

News of these investigations comes just as families of thousands of high-school students are scrambling to find the best financial-aid packages. Many colleges, concerned that the actions of a few individuals risk destroying the integrity of higher education, are engaging in some serious soul-searching. In an e-mail sent yesterday to 62 university presidents and chancellors, Robert Berdahl, president of the Association of American Universities, told the group's members that "even if you find that your student-aid office is doing nothing illegal, you should ask if your student-loan business arrangements, policies, and practices can stand the test of full public disclosure."