A year ago, students and parents often took out college loans based on "preferred lender" lists provided by schools, oblivious to the fact that some schools were benefiting financially from the arrangements. This spring, New York Attorney General Andrew Cuomo exposed quid pro quo agreements between many lenders and schools, including revenue-sharing agreements and financial aid officers' holding the stock of companies on their preferred-lender lists. More than two dozen schools and a dozen lenders have since signed Cuomo's code of conduct, which requires schools to fully disclose their relationships with lenders. Even schools untouched by the scandal have reviewed their policies, aware that students and parents are watching. Cuomo spoke with U.S. News about what has changed with college loans and what hasn't.
What advice would you give students and parents shopping for a loan right now?
Caveat emptor. Let the buyer beware. When you sign these loan documents, you are signing what is the equivalent of an education mortgage. It can be in excess of $100,000. You're paying for it for years and years. It will affect your credit rating. It's one of the most important financial decisions a young person is going to make. Inform yourself. Do not rely solely on the recommendations of the college. Ninety percent of students follow the recommendations of their college in terms of a "preferred lender." Basically, what we found was, those judgments are often conflicted, because schools and aid officers had financial interests in the outcome.
What will be different this year because of your investigation?
I hope two things. I hope we've begun to change the behavior in the marketplace and that colleges have re-evaluated what they do in this area and lenders have re-evaluated what they do. The state of New York has a new law in place that will definitely change their behavior, and the federal government is contemplating a law [the Sunshine Act]. Second, I hope students and their parents understand that they have to be better informed and that there was fraud in this marketplace, and they need to be informed to protect themselves.
How widespread were conflicts of interest?
I think it was widespread because it became an industry practice, and it's a competitive industry.... When one lender began offering incentives to schools, then the other lenders had to start to offer incentives. The competition of the marketplace drove the spread of the practices—the financial arrangements, the revenue sharing, the incentives alumni associations received for marketing to alumni, athletic departments that were doing their own marketing for their own commissions. It's widespread and pervasive—there's no doubt about it.
How much do you think students were being hurt by those relationships?
Depending on the circumstance, I think it cost [individual] students thousands of dollars.
Your three daughters will be going to college one day—are there things that still worry you about the system?
I have a few years before my daughters go. I hope we have this resolved by then. At this point, they will have to go to school in the state of New York, where we actually have the law; therefore, I won't have to worry about it, but I believe we will get federal legislation passed in the near term.... I think that federal law would make a tremendous difference.
Did you take out college loans yourself?
Yes, I did. The context here is important. Old people like me, when we took out loans, it was a significant amount of money but nothing like it is today. Today, you can come out with over $100,000 in debt. It is now a much more significant financial commitment, relatively, than it was 10, 20 years ago.
Did you have a good experience with your loans?
You know, I think I did. I took out loans and paid loans for years. I took loans for college and law school. But I wasn't even aware of these issues then. I didn't know enough to ask the questions. So I don't know if my schools had preferred-lender relationships.
Why did you decide to make investigating the loan industry a priority?
Because this is an issue that affects millions of people who can least afford it, concerning a very valuable commodity, which is access to higher education. You're talking about people who want to go to college, can't afford it, and are willing to take a loan because they believe it's a good investment, and who may be victimized in trying to achieve what we all say they should, which is a college education.