Colleges recommending lenders to students must adhere to stricter guidelines

CHICAGO - Beginning next school year, colleges that recommend specific lenders to their students must list at least three unaffiliated companies and disclose how they were chosen - reforms prompted by a wide-ranging investigation of student loans that has tripped up universities in Illinois and across the nation.

A final version of the new U.S. Department of Education regulations, which will be published in early November and go into effect in July, also will make it clear that college administrators cannot accept gifts, payments or other perks from lenders eager to get business at the campuses, Education Secretary Margaret Spellings and other officials told reporters during a conference call Wednesday.

"We encourage participants to start adopting these practices sooner rather than later," said Sara Martinez Tucker, Education Dept. undersecretary.

The new rules, similar to those pending in Congress, come toward the end of a year marked by scandals in the student loan industry. The Education Department has come under pressure to beef up its oversight, after numerous revelations of cozy relationships between colleges and lenders.

State and federal investigations found instances where financial aid officials held stock in companies on their universities' preferred-lender lists. In other cases, colleges and universities were receiving fees from lenders based on the number of students' loans.

The new rules for the first time mandate that colleges with preferred lender lists include a minimum number of companies. Critics have said that colleges used the lists to steer students to specific lenders, while supporters of such lists said they protected students by pointing them to reputable companies.

Campuses could be fined or barred from participating in the federal lending program, known as FFEL, if they violate the department's student loan policies.

Earlier this year, the Education Department sent warning letters to 921 colleges and universities where 80 percent of the federal student loan volume in 2006-2007 was handled by one lender. The letters reminded officials not to limit student choice in picking a lender.

Education Department officials said Wednesday that they sent 55 of those schools another letter on Oct. 24 requesting more information about their arrangements with lenders. At 48 of those schools, where federal loan volume exceeded $10 million a year, 95 percent of the loans went to one lender.

The letters went to schools where students had more than $10 million in federal loans last year. The Education Department did not provide a list of the schools.

The letters, also sent to 23 lenders, request copies of any agreements between colleges and lenders; information about cash, stock or other perks provided to college officials or the institutions; and the names of any college employees who served on lender advisory boards.