Eight direct-to-consumer (DTC) student loan providers agreed yesterday to abide by a code of conduct developed by New York Attorney General Andrew Cuomo to curb misleading private loan marketing. Seven of the eight lenders also agreed to donate more than $1.4 million to the AG's estimated $15 million national fund to educate students and families about the financial aid process. Many schools and lenders have questioned what has been done with the settlement money accumulated by Cuomo. Inside Higher Ed reports that the AG's staff has ignored several requests in recent months to detail that spending.
The eight lenders that agreed to abide by the settlement include: Nelnet, Campus Door, GMAC Bank, NextStudent, Xanthus Financial Services, EduCap, Graduate Loan Associates, and My Rich Uncle (MRU). MRU voluntarily agreed to adopt the code and did not donate to the AG's national fund. The agreement may be moot for some of the lenders that have suspended a portion or all of their student loan operations. MRU is the latest national lender to suspend making new private loans. It had ceased federal student loan operations earlier this year.
"Every year students and families are misled by direct to consumer marketing and borrow more expensive private or alternative education loans before exhausting federal financial aid options including federal student loans, which are usually less expensive and have additional protections for borrowers," said NASFAA President & CEO Dr. Phil Day in a press statement. "We appreciate the work of New York Attorney General Cuomo to curb these deceptive marketing practices and protect students and families trying to pay for higher education."
Cuomo began investigating DTC private loan providers in October 2007 by issuing subpoenas to EduCap, Affinity Direct/Educational Direct and three direct-to-consumer brands of the First Marblehead Corporation. The AG said he was perusing DTC marketers because of consumer advocates who complained about loan companies that bombard borrowers with misleading direct mailings, telemarketing calls, and Web and television advertising.
"This industry has a spotty track record when it comes to protecting consumers and it's time for the companies to be held responsible," said Cuomo in a press statement released yesterday.
Some of the deceptive practices uncovered by the AG include:
- Logos that appeared to be from the federal government
- False checks and rebates to borrowers to entice students to use their loans
- Illegal inducements and prizes meant to distract students from the terms and conditions of the loan
- Inducements that encouraged students recruit their friends to take out similar loans
- Advertising that misrepresented the terms and conditions of the loan and a failure to guarantee the advertised borrower benefits
Under the settlement, lenders will be prohibited from using any of those tactics and will be required to provide students with a disclaimer that they should exhaust all of their federal student loan options before turning to private student loans. The New York AG encourages students and families to learn more about taking out student loans online at www.oag.state.ny.us. They may also request a form to order a free informational DVD to learn more about the student loan process.
Additional Media Coverage
By Justin Draeger
NASFAA Associate Director for Communications
Posted 09/10/08 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.
