New York Attorney General Andrew Cuomo testified before the House Education committee today about his office’s headline-grabbing investigation into the often cozy relationships between student loan companies and college financial aid offices. He called many of the practices he uncovered “predatory lending,” and said that the mortgage market is now safer for consumers than the student loan market because of the lack of regulation, enforcement, and oversight.

 

Both lenders and school administrators have been in hot water since it became public that companies often offer inducements, such as vacations, meals, revenue sharing agreements, and staff time in order to convince financial aid offices or their employees to recommend them to potential student borrowers. Cuomo said that the Department of Education has been “asleep at the switch” when it comes to regulating conflicts of interest in both the Federal Family Education Loan Program (FFLEP) and in the private or “alternative” student loan market. He told the committee that “the practices we have uncovered were not undiscoverable until now. Rather, the entity charged with maintaining the integrity of the student loan market failed.”

He called for new regulations on preferred lender lists, and said that it if this was not a possibility it would be better to do away with them all together. He also asked for much stronger regulations for the private loan market, which he called the “wild west” of student lending because of the lack of consumer protections. This raised some questions about jurisdiction: can the education committee create regulations for the private student loan market, or is that up to the Financial Services Committee?

The hearing also brought up issues of guaranteed versus direct lending. Guaranteed loans, which are distributed under the FFLEP, involve private student loan companies originating loans which are guaranteed by the federal government. This means that companies make all of the profit, and take none of the risks. The direct loan program, on the other hand, involves the federal government lending directly to students, and is much cheaper for tax payers. None of the questionable practices discovered in the FFLEP and private loan program have been found on campuses that use direct lending, and it is unlikely that there are any similar problems.

Cuomo also mentioned that some of the cases he is investigating may involve criminal charges.