Education Secretary Spellings Announces Task Force to Probe Student Loan System

WASHINGTON – A federal task force will examine the ties between lenders and college financial aid officers amid growing concerns about student loans, Education Secretary Margaret Spellings said Tuesday.

New York Attorney General Andrew Cuomo, scheduled to testify before Congress on Wednesday, has been leading an investigation into the issue, and other attorneys general are joining him. Cuomo said Spellings' move was "too little, too late."

Cuomo says his investigators uncovered numerous arrangements that benefited schools and lenders at the expense of students. For example, investigators say lenders have provided trips for college financial aid officers who then steered students to the lenders.

The department's task force will be made up of Education Department officials. A panel of outside experts that included lenders, colleges and student representatives failed last week to agree on how the department should proceed with regulations covering relations between colleges and lenders.

Luke Swarthout, who lobbies on higher education issues for the U.S. Public Interest Research Group, represented students on the now-defunct panel. He said the process was doomed from the start. "There's only so much real reform you can push if the industry that needs to be reformed has a veto," he said.

The department's internal task force has been asked to look at preferred lender lists, in which colleges recommend certain lenders to students; inducements lenders make to colleges to gain preferential status and a federal database that has raised worries that lenders have mined it for financial information about students. The department recently banned lenders from accessing the database.

Spellings said she wants the task force to report back in about a month with recommendations for new federal regulations.

Republicans and Democrats in Congress also are pushing legislative fixes to the kind of problems Cuomo highlighted. Some lawmakers want to write into law a code of conduct that several schools and lenders recently agreed to abide by as part of a settlement with the attorneys general.

The code would ban lenders from paying colleges in exchange for being designated a preferred lender. It also would ban lenders from paying for trips for financial aid officers and other college officials. Lenders also would not be allowed to pay college employees to serve on advisory boards.

"The reforms we are pursuing in Congress, together with the work of the secretary's task force, will provide added help to families paying their college bills, restore trust in our student loan program and make abuses within the system illegal," said Sen. Edward Kennedy, D-Mass., who chairs the Senate education committee.

But California Democratic Rep. George Miller, who chairs the House education committee, said Spellings should do more than form a task force. He has urged her to temporarily ban the use of preferred lender lists. He isn't alone in questioning how much the task force will accomplish.

Jon Oberg, a former Education Department researcher who uncovered a scheme in which lenders improperly sought an artificially high rate of return on loans, said the department's oversight of the industry has been weak.

"I'm happy that the attorney general of New York and now others are exercising some oversight," Oberg said. "Actually the problem should have been addressed much earlier by Congress and the department, because these problems have been known for some time."

The department has had its own problems with the loan system. A senior department student aid official, Matteo Fontana, has been placed on leave pending an investigation into his holding of at least $100,000 in stock in Education Lending Group, the former parent company of Student Loan Xpress — a company Cuomo is investigating.

The Wall Street Journal reported Tuesday that a second student aid official in the department, Michael Sutphin, reported holding more than $50,000 in stock in student-loan giant Sallie Mae. According to disclosure forms, he held the shares until the spring of 2004.

Under department guidelines, ownership in stock valued at more than $15,000 prevents an employee from working on issues related to that company. A note in Sutphin's file initially disqualified him from working on issues related to his Sallie Mae holdings. Subsequent reports showed he continued to own some shares, though under the $15,000 threshold.

Education Department spokeswoman Katherine McLane said Tuesday she knew of no wrongdoing in Sutphin's case. "There's a process. He complied with it. Our ethics office complied with it," she said.