My Rich Uncle - 2007 Student Lending Scandal

2007 Student Lending Scandal

As a lender, MyRichUncle took an activist role in the student loan industry, critical of the relationships between many financial aid offices and incumbent lenders. In 2006, MyRichUncle drew attention for publishing a New York Times advertisement questioning financial aid administrators practice of taking "kickbacks" from lenders in exchange for a place on their "preferred lender" lists. This “payola” or “pay-to-play” system, which was later confirmed in the press, saw lenders pay financial aid offices for leading students to take loans out from them. The MyRichUncle campaign pointed out that these deceptive practices on the part of financial aid offices and lenders were resulting in higher interest rates for students and a lack of transparency for students into available education financing options.

In January 2007, New York Attorney General Andrew Cuomo began an investigation to uncover relationships between schools and lenders. MyRichUncle’s campaign is often cited as a catalyst in initiating the attorney general’s investigation of student lending practices. On March 15, 2007 the New York Attorney General released a summary of the investigation’s early findings:

“There is an unholy alliance between banks and institutions of higher education that may often not be in the students’ best interest,” Andrew Cuomo said in a news release. “The financial arrangements between lenders and these schools are filled with the potential for conflicts of interest. In some cases they may even break the law.”

The following month, on April 4, 2007, the New York Attorney General released another statement: "We are seeing more and more suspicious practices and dealings between university officers and loan companies come to light....This creates even more questions about the integrity of the student loan industry and the process by which colleges steer students to loans."

As the scandal unfolded, MyRichUncle took the opportunity to distinguish itself from other lenders and started to market itself as the “conflict-free” alternative. MyRichUncle was attacked in the press by the established industry players. However, between March and May 2007, a number of related stories made it to press, confirming MyRichUncle’s allegations of systemic misconduct in the student loan industry.

• In March 2007, it came to light that certain lenders were operating call centers providing financial advice for students where company employees would, in some cases, identify themselves as university advisers. Nelnet was found to be operating a call center supporting ten different universities (including Texas Tech and Wayne State University). Sallie Mae was identified as operating call centers supporting approximately twenty different institutions including Pace University, Mercy College, and Seton Hall University.

• On April 11, 2007, Sallie Mae agreed to pay $2 million into a fund to educate college-bound students as part of a settlement with the New York Attorney General. The lender also agreed to no longer pay for travel and expenses for university officials, provide unpaid staffing assistance to financial aid offices, or operate call centers that provide financial advice for students where company employees identify themselves as university advisers.

• In April 2007, New York Attorney General Andrew Cuomo announced that his office would sue Drexel University. According to Cuomo's investigation, Drexel received over $124,000 from revenue sharing agreements with Education Finance Partners (EFP) and had accrued an additional $126,000 through March 2007. Since 2005, Drexel had sent over $16 million in loan volume to EFP as part of its preferred lender list.

• More than 60 colleges had "revenue sharing" agreements with Education Finance Partners. JP Morgan Chase was found to have spent $74,000 to “wine and dine” student loan officials from more than 200 colleges onboard a Manhattan cruise ship in 2005. Additionally, the bank was shown to have employed five university loan officers while they still held positions at their respective colleges.

• At the University of Texas’ Office of Student Financial Services, lenders were found to have provided gifts such as steakhouse dinners and ice cream carts in the hope of obtaining a place on the University’s preferred lender list. In one article, it was revealed that the financial aid office was alleged to have used “‘treats’ as a unit of measurement in preferred -lender list analyses.”

• Columbia University fired its Financial Aid Director (David Charlow) after it was discovered that he held a financial interest in a student loan provider, “Student Loan Xpress,” that he promoted to parents and university alumni. Mr. Charlow had received 7,500 stock options from the lender. In 2005, it was discovered that he earned a total of more than $100,000 from all the sales. Student Loan Xpress was put on Columbia's preferred lender list in 2005. A Columbia spokesman stated that Mr. Charlow had “abused a position of trust and violated the university policy on conflicts of interest.”

• A Senate Report was released, detailing many of the unethical and deceptive practices occurring between financial aid offices and universities. One of the examples in the report describes how Nelnet, a lender based in Nebraska, created an elaborate point system to reward college officials who advised it. Contributing an idea for a product earned 25 credits. Completing an online survey won another twenty-five credits. The credits could be redeemed for donations to an alma mater or college/university of choice. Each was good for $1.