A scandal involving the student loan industry is shaking up financial aid offices in colleges and universities throughout the country and might claim a federal Education Department (ED) official, too. The scandal serves as a harsh reminder to school administrators and technology directors everywhere of the dangers posed by potential conflicts of interest in dealings with education vendors.

New York Attorney General Andrew Cuomo started looking into the lucrative, $85 billion college loan industry shortly after his election in November. Cuomo’s investigators say they have found numerous arrangements that benefited schools and lenders at the expense of students. In some cases, investigators said, lenders provided all-expense-paid trips to exotic locations for college financial aid officers who directed students to the lenders.

On April 5, it was revealed that Matteo Fontana, the ED official who oversees all lenders and guarantee agencies that participate in the Federal Family Education Loan Program, owned about $100,000 worth of stock in a student loan company caught up in Cuomo’s probe.

A September 2003 filing with the Securities and Exchange Commission (SEC) shows Fontana held at least 10,500 shares of Education Lending Group Inc., the former parent company of Student Loan Xpress. The shares were valued at around $9.50 each at the time, according to Cuomo’s office.

Student Loan Xpress is now part of CIT Group Inc., one of several lenders targeted in Cuomo’s probe.

Fontana joined ED in November 2002, according to Higher Ed Watch, a part of the New America Foundation, which first reported his involvement with Education Lending Group. It was unclear whether Fontana told agency officials of his ownership in the stock before he sold it in 2003.

Fontana was placed on paid leave following the revelation, department spokeswoman Katherine McLane said April 6. The case has been referred to the department’s inspector general, John Higgins, who will determine whether Fontana violated ED’s conflict-of-interest rules.

Also on April 5, the University of Texas (UT) put its financial officer, Lawrence Burt, on paid leave and the University of Southern California (USC) did the same with its financial aid officer, Catherine Thomas. Columbia University had already placed its associate dean of student affairs, David Charlow, on leave while it investigates Cuomo’s claims.

SEC records show Charlow owned 7,500 shares of Education Lending Group’s stock and owned 2,500 stock warrants at the time of the stock prospectus. Cuomo’s office said Charlow sold the 7,500 shares for about $9.50 each and in 2005 sold more of the securities for a total profit of more than $100,000.

Investigators said Charlow bought the securities for $1 a share in 2001. Cuomo’s office believes others also got similar deals.

On April 5, Columbia University said it removed Student Loan Xpress from its list of preferred lenders and believes Charlow was the only official at the school who owned stock in Student Loan Xpress’ parent company.

SEC records also show Thomas and Burt each owned 1,500 shares in the company.

Burt denied any financial arrangement between either himself or UT and the company and said his previous ownership of the shares had no connection to Student Loan Xpress’ position on UT’s preferred lender list. Burt sold the stock in 2003, he said. Based on the stock’s price of $9.50 per share at the time of the sale, Burt made a little more than $14,000.

ED spokeswoman McLane also said Education Secretary Margaret Spellings has asked for Burt to resign from the department’s Advisory Committee on Student Financial Assistance. That panel provides guidance to Congress and the education secretary on student financial aid policy.

Cuomo’s office issued a subpoena last week to the New Jersey-based CIT seeking information about stock transactions between Student Loan Xpress and financial aid officers at Columbia, UT, and USC.

CIT said it acquired Education Lending Group in 2005, after the stock transactions took place.

“The reported transactions in securities of that company occurred several years prior to CIT’s acquisition of the company,” CIT said in a statement. “We are currently seeking to determine the facts surrounding those transactions.”

Cuomo spokesman John Milgrim said the subpoenas “clearly cover” all stock transactions between CIT and college officials.

Earlier on April 5, The Associated Press reported that John Ryan, chancellor of the 64-campus State University of New York system, serves on CIT’s board of directors.

Ryan, who announced last month that he will step down at the end of May, has been a director at CIT since July 2003, according to the company’s web site. A company SEC filing shows Ryan earned about $146,000 last year in cash, stock, and options for his service on the CIT board. He is paid $340,000 a year as chancellor.

Student Loan Xpress is also listed as a preferred lender at SUNY Maritime College, where Ryan served as president after retiring from the Navy and the Naval Academy in 2002.

“The chancellor stands by his service on the board of the CIT Group, an approved outside activity, for which he received state Ethics Commission permission on July 2, 2003, while he was at SUNY Maritime, and July 20, 2005,” SUNY spokesman David Henahan said in a statement.

Cuomo’s office is investigating several other lenders, including the nation’s largest student-loan provider, SLM Corp.–commonly known as Sallie Mae. Others include Nelnet Inc., Education Finance Partners Inc., EduCap Inc., and the College Board. Citibank on April 3 agreed to put $2 million toward a national fund that would educate students and parents about the financial aid industry and is no longer being investigated by Cuomo.

Links:

New York attorney general’s office

http://www.oag.state.ny.us

CIT Group Inc.

http://www.citgroup.com

New America Foundation

http://www.newamerica.net