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Education Policy Program

Special Report: Student Loan Scandal

special_report.JPGThe New America Foundation's Higher Ed Watch Project was the first to uncover and publicize illegal payoffs from student loan banks to college financial aid officials. When we discovered that several financial aid directors at major universities and a Department of Education official owned and sold a significant amount of student loan company stock, we became suspicious. Our subsequent investigation and those of others revealed a series of payoffs, kickbacks, and luxury gifts to aid officials, thus compromising college-student relationships. Supposedly impartial intermediaries in the federal financial aid system were operating with substantial personal conflicts of interest.

This page contains information about our investigation and the fallout in the financial aid world, including 10 firings and resignations, hundreds of settlements with state Attorney Generals, and new federal legislation. Below is a chronology of important news articles and opinion pieces, short summaries of valuable investigative stories, and links to some of our sources.

News Chronology


  • Loan Company Offers Caribbean Junket to Financial Aid Officers, October 23, 2006

    Higher Ed Watch is the first to report that the loan company Loan to Learn offered financial aid administrators a four day, all-expense paid luxury trip to the Caribbean West Indies. Loan to Learn was a private loan company that offered high-cost private loans to students with interest rates as high as 16% per year and origination fees of up to 10%. The company canceled the trip after a flurry of negative media coverage, despite maintaining that the trip was not an advertising ploy for the company's loans.

  • Stock Options Provided to Financial Aid Officers by Student Loan Provider, April 4, 2007

    Higher Ed Watch is the first to report on the Student Loan Xpress stock holdings of three financial aid directors. According to our investigation, financial aid directors at Columbia University, the University of Southern California, and the University of Texas at Austin, were preparing to sell 10,500 "cut-rate insider" shares of stock from the parent company of Student Loan Xpress, which were worth more than $100,000 at the time. The three college aid officials sat on an advisory board that provided strategic advice for Student Loan Xpress.

    The investigation prompts the three universities to put the officials on paid leave and draws New York State Attorney General Andrew Cuomo's and Congress' attention to potentially illegal financial compensation by Student Loan Xpress.

  • Education Department Official Implicated in Widening Student Loan Scandal, April 5, 2007

    Higher Ed Watch is the first to report that an Education Department official directly involved with the federal student loan program also held stock in Student Loan Xpress. According to our investigation, the Education Department official, Matteo Fontana, held at least 10,500 shares, worth over $100,000, in Student Loan Xpress as of September 2003. Fontana was in charge of overseeing lenders and guarantee agencies that participate in the Federal Family Education Loan Program (FFELP).

    The investigation prompts the Department to place the offical on paid leave and begin a review of its disclosure requirements.

  • Nelnet's Friend with Benefits, August 7, 2007

    Higher Ed Watch is the first to report that Nebraska Attorney General Jon Bruning received campaign contributions from employees at Nelnet, a Nebraska-based student loan company. Bruning had decided to forgive a $1 million settlement that Nelnet had reached with his office in April, after his settlement failed to stop New York Attorney General Andrew Cuomo from pursuing a separate $2 million settlement with the company. Bruning continued to defend Nelnet as an "ethical, decent, and honest company" and attacked Cuomo's student loan investigation as an "embarrassment."

    The investigation into his campaign contributions prompts Bruning to reverse his decision and reinstate the $1 million settlement.


October 24-27, 2006
Loan to Learn Offers Caribbean Trip to Financial Aid Officials, Prompts Investigation of Preferred Lender Lists

April 5, 2007
First Investigation of Three Financial Aid Directors

April 6, 2007
Investigation of Department of Education Official

April 7, 2007
Continuing Investigation of Stock Holdings

April 9, 2007
Student Loan Xpress Officials Placed on Leave

April 10, 2007
Three More Financial Aid Administrators Implicated

April 11-12, 2007
Sallie Mae Settles With AG Cuomo

April 13, 2007
Official at the Department of Education Had Disclosed Stock

April 14-15, 2007
More Criticism of Lender Arrangements

April 16, 2007
Education Finance Partners Settles With Cuomo

April 17, 2007
Cuomo's Investigation Expands; Legislation to Bar Lender Perks Introduced in New York

April 18, 2007
Department of Education Blocks Lender Access to Student Loan Database

April 19, 2007
Rep. Miller Urges Sec. Spellings to Issue Emergency Regulations

April 20, 2007
Cuomo Announces He Will Sue Drexel

April 21-23, 2007
Nelnet Discloses Ties, Signs Agreement with Nebraska AG

April 24, 2007
First Multistate Settlement with Three Colleges

April 25, 2007
Sec. Spellings Announces New Student Loan Task Force; NASFAA Considers Policy Changes

April 26, 2007
Coverage of Cuomo's Testimony at House Hearing

April 27-30, 2007
Kennedy Opens Probe Into Collection Tactics; Local Investigations Continue

May 1, 2007
6 More Colleges Adopt Cuomo's Code of Conduct; ED Announces It Will Restore Access to Student Loan Database

May 2, 2007
Miller Requests Documents from White House on Student Loan Correspondence

May 3, 2007
Enzi Introduces Student Loan Legislation; Miller Requests FTC Investigation; Student Loan Database Reopened

May 4, 2007
Cuomo Expands Investigation to Alumni Associations

May 5-7, 2007
IG Begins Inquiry into ED Oversight; New Jersey AG Investigates Guaranty Agency Arrangement with Lender

May 8, 2007
New York Legislature Passes Student Loan Code of Conduct into Law

May 9, 2007
Theresa Shaw Resigns from ED Student Loan Office; Sunshine Bill to be Introduced in House

May 10, 2007
Student Loan Sunshine Act Passes House

May 11, 2007
Coverage of Spellings' Testimony at House Hearing; Cuomo Reaches Settlement with Student Loan Xpress

May 12-15, 2007
UT Fires Financial Aid Director Larry Burt

May 16, 2007
Cuomo Settles With Two More Universities

May 17-24, 2007
Two More Financial Aid Directors, at Johns Hopkins and Columbia, Forced Out

May 29-30, 2007
Wells Fargo, the Last of the 5 Largest Student Loan Companies, Agrees to Cuomo's Code of Conduct

June 4-5, 2007
Department of Education Releases New Rules for Student Lenders

June 11-12, 2007
Growing Concerns about Students Coping with Private Loan Debt

  • New York Times, "Private Loans Deepen a Crisis in Student Debt"
  • Chronicle of Higher Education, "Congress May Revisit Bankruptcy Protection for Student Borrowers"
  • Chronicle of Higher Education, "Congress Considers Linking Student-Loan Terms to Income"
  • Chronicle of Higher Education, "Education Department Whistle-Blower Says Agency Ignored His Report on Private Lending"

June 12-14, 2007
House Education Committee Passes Bill Cutting Lender Subsidies

June 15, 2007
Sen. Kennedy Releases Report on Student Loan Scandals; JHU Settles with Cuomo

June 16-18, 2007
More College Officials Implicated

June 19-22, 2007
Senate Education Committee Passes Higher Ed Reconciliation/Reauthorization Bills; More Investigations into Student Loan "Redlining"; More Lenders Agree to Cuomo's and State-Level Codes of Conduct

June 23-29, 2007
Lenders Fight Subsidy Cuts and Loan Auction Proposals

  • Chronicle of Higher Education, "Student-Loan Companies Meet to Fight Planned Cuts in Federal Subsidies"
  • Chronicle of Higher Education, "Congress May Radically Change How Student-Loan Subsidies Are Set"
  • Chronicle of Higher Education, "Jet Set: Sallie Mae's Plane Was Fine for Senator Kennedy Before Lender Controversy Took the Spotlight"
  • Inside Higher Ed, "Should Student Loans Go to Market?"
  • Baltimore Sun, "Maryland colleges sign code of conduct"

July 9-10, 2007
Financial Aid Officials Meet at Annual NASFAA Conference and Discuss Loan Scandal

July 11-12, 2007
House Passes College Cost Reduction Act, 273-149

July 16-19, 2007
Spending by Nonprofit Lender Educap / Loan to Learn Questioned

July 20, 2007
Senate Passes Budget Reconciliation Legislation, 78-18; Amendment that Would Have Reduced Lender Subsidy Cuts is Defeated; College Loan Corporation Settles with AG Cuomo

July 23-26, 2007
Senate Passes Higher Education Act Reauthorization, 95-0, with Stricter Regulations on Loan Industry; More Scrutiny of Educap / Loan to Learn

July 27-August 1, 2007
Nelnet Settles with AG Cuomo for $2 Million and Ends Deals with Alumni Associations; Other Higher Education Relationships Questioned

August 2, 2007
GAO Report Criticizes Education Department's Oversight of Student Loans; Educap / Loan to Learn Cuts Jobs, Begins Shutdown; AG Cuomo Starts Investigation into Deals Between Lenders and Athletics Departments; Senate Banking Committee Passes Private Loan "Sunshine" Legislation

August 3-10, 2007
Nebraska AG Jon Bruning Forgives Previous Nelnet Settlement, Fires Criticism at AG Cuomo; Sec. Spellings Urges Colleges and Lenders to Adopt Loan Regulations Before They Go into Effect

August 11-15, 2007
Nebraska AG Jon Bruning Reinstates Nelnet Settlement

August 23, 2007
College Board Ends its Student Loan Activities

September 1-2, 2007
First Marblehead Comes Under Scrutiny

September 5, 2007
New Report from Sen. Kennedy Details Quid Pro Quos in Student Loan Industry

September 6-7, 2007
Congress Passes Budget Reconciliation Bill; Boosts Pell Grant and Cuts Stafford Interest Rates

September 11-27, 2007
IG Criticizes Ed Department Oversight of Guarantee Agencies; Colleges Look at Broader Conflict of Interest Issues

September 28, 2007
President Bush Signs College Cost Reduction and Access Act into Law

October 1-12, 2007
AG Cuomo Investigates Loan Marketing Tactics; Senator Hillary Clinton Attacks FFEL

October 15-November 10, 2007
Ed Department Announces New Student Loan Regulations, Begins Investigation of Colleges with One Primary Lender

November 11-16, 2007
House Ed and Labor Committee Approves Higher Education Act Reauthorization Bill

November 17-December, 2007
Inquiries into Practices of State Non-Profit Lenders Continue; AG Cuomo Issues Code of Conduct for Direct Student Loan Marketing

January 2008
Student Lenders Deal with Declining Profits and Loss of Political Favor; Colleges Face Conflict of Interest Questions

February 2008
House Passes Higher Education Act Reauthorization, Cuomo expands his probe into other areas

March 2008
Closer looks into colleges' deals with credit card companies, PHEAA tires of scrutiny

April 2008
Sallie Mae still keeps ties with college financial aid websites, more concerns about student credit card marketing

May 2008
Concerns about loan availability lead the ED Dept. to relax previously enacted restrictions on preferred lender lists

June 2008
More information on private loan borrowing, while the Federal Trade Commission tries to tackle deceptive marketing

July 2008
More details emerge on Sallie Mae's ties to the country's largest guaranty agency; Congress gets closer to renewing the Higher Education Act

August 2008
State audit is critical of the Pennsylvania Higher Education Assistance Agency

September 2008
Several lenders agree to a student loan code of conduct put forth by New York State Attorney General Andrew Cuomo

October 2008
Iowa's state attorney general finds wrongdoing by the Iowa Student Loan Liquidity Corporation

November 2008
Cuomo settles with another student loan company; investigations into college and university presidents' role on corporate boards

December 2008
Another loan company settles, while the Department's Inspector General releases another critical audit of the Office of Federal Student Assistance

January 2009
Iowa Student Loan Company changes board makeup following audit, while an Ohio company is accused of violating a rule banning lenders fom paying for loan volume



This is a collection of editorial and op-eds written on issues relating to the student loan scandals.



Investigative Stories

News stories that went beyond reporting and investigated a particular issue in depth:

  • Inside Higher Ed, "Scrutiny and Self-Scrutiny on Student Loans," April 6, 2007
    Conflicts of interest exist within the National Association of Student Financial Aid Administrators (NASFAA) because of significant financial support from the student loan industry. The laissez-faire attitude of the association toward student lender practices could partially be to blame for the questionable actions of financial aid administrators.

  • New York Times, "Student Lender Planned to Woo Officials," April 10, 2007

    Student Loan Xpress had specific, calculated strategies to ingratiate the company with colleges and universities. To get on preferred lender lists, three top executives targeted financial aid directors using placement on advisory boards, compensation for consulting, and stock options.

  • Associated Press, "Cuomo: School Loan Corruption Widespread," April 10, 2007
    New York State Attorney General Andrew Cuomo speaks out about the unraveling student loan scandal. Admitting the problem is bigger than he originally thought, Cuomo says these questionable practices are the rule rather than the exception.

  • New York Times, "Senate Inquiry in Loan Case Is Studying Stock Transfer," April 11, 2007
    Senator Edward Kennedy calls for federal regulators to look into stock received from Student Loan Xpress. Fabrizio Balestri, an executive at Student Loan Xpress, may have illegally sold private company stock to financial aid directors and a Department of Education official, calling the transfers "gifts."

  • Chronicle of Higher Education, "Advisory Boards That Include College Officials Are Common Among Lenders, But Most Offer No Pay," April 11, 2007
    Financial aid directors sometimes serve on student loan advisory panels, and often those student loan companies pop up on their preferred lender lists. Directors may not receive pay, but there are still perks to serving on panels – perks that can create a conflict of interest.

  • Wall Street Journal, "Trade Group Saw Possible Conflicts In Student Loans" (subscription only), April 11, 2007
    The National Association of Student Financial Aid Administrators (NASFAA) has some questionable connections to the student loan industry. When NAFSAA's board had the chance to regulate lender gifts, it voted against any regulations, and in the past the association has sided with the loan industry on student loan reform issues.

  • Chronicle of Higher Education, "Sallie Mae Will Pay Settlement of $2-Million in New York Investigation of Lenders' Practices," April 12, 2007
    New York State Attorney General Andrew Cuomo and Sallie Mae may have reached a settlement, but the company has promised colleges that it will continue to operate in the same manner, including providing questionable "opportunity loans." While Cuomo stated that Sallie Mae engaged in "acts, practices, and omissions" that violated several laws, Sallie Mae touted the settlement as affirming its "ethical market practices" and did not admit to any wrongdoing.

  • Wall Street Journal, "Did Revolving Door Lead To Student Loan Mess?" (subscription only), April 13, 2007
    Many Department of Education employees have ties to the student loan industry, either having been employed by student lenders or having worked in a related field. This revolving door may have contributed to the current student loan scandal, as the Department has done little to regulate conflicts of interest and has been lenient with disclosure requirements.

  • New York Times, "Lenders Sought Edge Against U.S. in Student Loans," April 15, 2007
    Student loan companies have successfully prevented the government’s Direct Loan program from competing with the Federal Family Education Loan (FFEL) program by offering potentially illegal financial inducements to colleges to leave the Direct Loan program, including pots of money for "opportunity loans," or high-interest private loans for high-risk borrowers. In conjunction with lax oversight by a friendly administration, private lenders have taken business away from the Direct Loan program, which is cheaper to administer.

  • Washington Post, "Lenders Misusing Student Database," April 15, 2007
    Student lenders may be improperly mining confidential student data from a national database run by the Department of Education. The Department is considering a temporary shutdown of the database, as both college and Department officials have raised concerns that lenders are using the database for consolidation or private loan marketing purposes.

  • Wall Street Journal, "Lenders Ply Aid Officials At Schools With Free Stuff" (subscription only), April 17, 2007

    Gifts from student loan companies to financial aid officials, such as dinners, gift certificates, and DVD players, have become commonplace in recent years. Attorney General Andrew Cuomo is urging the entire student loan industry to adopt a "Student Loan Code of Conduct," which would include banning gifts worth more than a "nominal" value.

  • Raleigh News & Observer, "Scandal gets aid officers thinking," April 18, 2007
    A local investigation reports on referral deals between alumni associations and student loan consolidation companies. Some alumni associations have entered into contracts with loan companies under which a certain amount of money is "kicked back" to the association for every alumni that consolidates student loans with that company.

  • New York Times, "Colleges Relying on Lenders to Counsel Students," April 21, 2007
    Some universities use private student loan companies to conduct exit counseling sessions for their students, which are mandatory if a student has federal loans. These lenders often do not disclose their affiliations and take advantage of the sessions to market their consolidation loans to students.

  • The Daily Texan (University of Texas-Austin), "Gifts were factored into UT's ranking of preferred lenders," April 30, 2007
    A college newspaper uncovers that the Office of Student Financial Services at UT-Austin accepted and used gifts to decide which lenders were chosen for its preferred lender list. One of the criteria on the office's lender list analyses was "OSFS visibility...based on the number of lunches, breakfasts and extracurricular functions for entire OSFS staff." Gifts included happy hours, steak dinners, birthday cakes, and golf outings, and documents reveal that certain financial aid officers went out of their way to maintain these preferred lender relationships.

  • Washington Post, "Warnings On Student Lenders Unheeded," May 1, 2007
    In 2001, the Bush administration abandoned a proposal drafted by the Department of Education under Clinton to more clearly define which lender practices violate federal prohibitions. In addition, the Department has been aware of allegations of improper behavior since 1999, and industry executives have specifically asked the Department for guidelines on prohibited inducements.

  • Newark Star-Ledger, "College loan panel drops lender deal," May 1, 2007
    New Jersey's state student loan guarantor, the Higher Education Student Assistance Authority, recently terminated a contract with Sallie Mae under which it had received a fee for every student loan it directed to Sallie Mae. The guaranty agency marketed Sallie Mae's loans and offered incentives to colleges that selected Sallie Mae as their preferred lender, without disclosing the fees it was receiving for loan volume.

  • Chronicle of Higher Education, "Rhode Island Center That Answers Students' Questions About Loans Is Staffed by a Loan Company," May 3, 2007
    In addition to operating call centers at colleges, Nelnet helps staff a state non-profit college counseling center in Rhode Island that claims to offer free, independent advice. When asked questions about student loans, employees do not disclose their affiliation with Nelnet and only refer students to Nelnet loans offered through the state's nonprofit student loan agency.

  • Chronicle of Higher Education, "Critics Question Sallie Mae's Close Ties With Agency That Guarantees Its Loans," May 4, 2007
    The loan guarantor in charge of overseeing and evaluating Sallie Mae's loans, USA Funds, is staffed mostly by Sallie Mae employees. This presents a significant conflict of interest, as guarantee agencies are responsible for debt collection, default-aversion payments, performance reports, and ensuring that the lender has performed the necessary "due diligence" on its loans.

  • New York Times, "Whistle-Blower on Student Aid Is Vindicated," May 7, 2007
    Jon Oberg, a retired Department of Education researcher, alerted Department officials to improper 9.5 percent loan subsidy payments in 2003, but was told to stop working on the issue and return to grant research. Oberg's story is another example of the Department's inadequate oversight of the student loan industry, which in the case of 9.5 percent loans cost taxpayers significant amounts of money and allowed lenders to reap the profits.

  • Chronicle of Higher Education, "Suspended Education Department Official Approved 2004 Conflict Waiver for Former Employer, Sallie Mae," May 7, 2007
    Matteo Fontana, the suspended Department of Education official who owned stock in Student Loan Xpress, issued a ruling in 2004 that allowed Sallie Mae to continue providing services for USA Funds, a guaranty agency intended to serve as an independent evaluator of Sallie Mae's loans. Fontana, who previously worked for Sallie Mae, ruled that the relationship did not pose a conflict of interest, in contrast to a report by the Department's Inspector General.

  • Cleveland Plain Dealer, "Bad debt pays off in loan industry," May 13, 2007
    A private lender can earn money off of bad debt by "dumping" the loan onto the Direct Loan default consolidation program and claiming it recovered the debt. These new, consolidated government loans are no longer the private lender's problem, but instead cost taxpayers an estimated $400 milion per year.

  • Chronicle of Higher Education, "As Student-Loan Industry Hunkers Down, It Sees Friends in Education Department Disappearing" July 16, 2007
    This article investigates the changing relationship between lenders and members of the Education Department, as enhanced scrutiny from investigations into student loan kickbacks and improper billing has led to some personnel changes.
  • Dallas Morning News, "Lenders Showered Perks on UTA, UTD Aid Officers," July 30, 2007
    Student aid officials at the Arlington and Dallas campuses of the University of Texas received numerous perks, including free lunches, tickets to sporting events and happy hours, according to internal documents released by the schools. Officials at these institutions also asked loan companies to underwrite the cost of printing financial aid brochures in exchange for being recommended to students as a preferred lender.

  • Chronicle of Higher Education, "Contract Raises New Concern Over Sallie Mae's Ties to Guarantor" June 26, 2008
    A contract between the student loan company Sallie Mae and United Student Aid Funds (USAF), the nation's largest guarantor, reveals just how closely related the two entities have become. Sallie Mae pays USAF nearly $250 million each year in exchange for taking on almost all of the guarantor's roles concerning loan oversight and administration.
  • Inside Higher Ed, "Did Congress Tame the ‘Wild West’?" Sept. 10, 2008
    This article looks back at the effects of New York State Attorney General Andrew Cuomo's investigation into the improper ties between loan companies and postsecondary institutions. It also looks at how Cuomo's scrutiny led several companies and schools to alter their behavior, while also forcing Congressional action.
  • Chronicle of Higher Education, "Suit Alleges Fraud in 'Resolving' Troubled Student Loans" October 23, 2008
    A lawsuit alleges that Sallie Mae's default prevention tactics consisted of pretending to issue deferments for borrowers who never actually answered the phone, and other underhanded tactics. In addition, it created an overly competitive culture that pretty much necessitated such behahvior to succeed.

Other Resources

Some other resources related to financial arrangements between financial aid officials and student lenders: