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Student-loan deals draw legal interest

KAI RYSSDAL: It's not a Wall Street scandal, but it's got the hallmarks of one. Kickbacks in return for market access. Shady dealings between marketers and banks. And no real regulations covering most of what's been going on.

Investigations into the student loan industry continue to widen. Schools and lenders are putting people on paid leave while everybody sorts things out. Today, New York Attorney General Andrew Cuomo compared his probe to the peeling of an onion. He said he's discovering layer after layer of wrong-doing.

Stephen Burd follows education policy at the New America Foundation. Mr. Burd, good to have you with us.

STEPHEN BURD: Thank you for having me.

RYSSDAL: You know, the first thing that came to my mind when this story broke was what are the rules about this? Is anything of what's been happening illegal?

BURD: Not necessarily. Particularly from the federal standpoint. Now I know that the attorney general of New York state, Andrew Cuomo, is looking at this as it applies to New York state law. But what I'm familiar with is the Federal Higher Education Act. And that act includes a very general statement barring lenders in the student loan programs from offering inducements to colleges to get student loan business. The problem is that language in the law is very general. And it's not clear that any of the allegations actually are illegal, but they do appear to raise serious questions in terms of conflicts of interest.

RYSSDAL: What does this say about the state of competition in this market? It must be reasonably cut-throat out there if banks and lenders are offering all these inducements to these college staff people to get them to sort of go behind students' backs.

BURD: It is extremely competitive right now. The dirty little secret of the federal loan program is just how concentrated it is. Only 32 lenders currently hold 90 percent of the student loan volume. And what's more, the Education Department has found that at about 300 colleges, one lender controls 99 percent of the loan volume — essentially giving those lenders monopolies on those campuses. So what's happened is new companies trying to break into the market have had to rely on unconventional means. The attorney general of New York has been questioning some of them, including revenue-sharing arrangements in which colleges get a cut of each loan that they provide to their students.

RYSSDAL: How did we get to this point where the market is so locked up?

BURD: Federal officials have really turned a blind eye to the problems that are occuring in the student loan program and the amount of concentration that there is in the program — as well as the types of inducements that lenders are using to win business. When they came to power, the Bush administration really sort of had a reverence for the private sector. And they rewarded loan industry officials and lobbyists with prominent positions throughout the Education Department. Meanwhile, lenders such as Sallie Mae, the biggest loan provider in the country, have showered Congress with hundreds of thousands of dollars in campaign contributions. So there's really been a cozy relations that have developed, that developed between the Bush administration, the Republican-led Congress and lenders. And they really left the loan industry very unregulated.

RYSSDAL: Make a guess for me. How long's it gonna be before Congress starts hearings on this and we have a whole new set of regulations about the student loan industry?

BURD: Right now, it seems like the Democrats in control of Congress and in the key committees are really sort of starting their own investigations. They've sent letters to different colleges and to the Education Department asking for various documents related to the relationships and arrangements. I'm guessing, though, that we will be . . . that there will be hearings coming up fairly soon. Senator Kennedy has already introduced a bill called the Student Loan Sunshine Act, which is trying to get more disclosure about these types of arrangements that lenders and colleges have entered into. But I believe that with some of the latest revelations, Senator Kennedy and others will be toughening up the legislation they were considering offering.

RYSSDAL: Stephen Burd at the New American Foundation. He's a research fellow there. Mr. Burd, thanks a lot for your time.

BURD: Well, thank you for having me. I appreciate it.

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