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Student Lending Kickback Scandal Spreads To Rancho Bernardo Lender

The scandal involving kickbacks to college financial aid officials by student loan companies that surfaced last month has affected a second San Diego lender that specializes in providing government guaranteed student loans.

College Loan Corp., based in Rancho Bernardo, confirmed it is cooperating with requests from the New York State Attorney General’s office for information about its relationships to colleges where it makes student loans, specifically how it obtains and maintains its status as a preferred lender.

CLC was among a group of 13 of the nation’s largest student loan companies that received subpoenas from Andrew Cuomo’s office earlier this month. These also included Bank of America, U.S. Bank, Wells Fargo Bank, JP Morgan Chase and Wachovia Bank.

In March, Cuomo called attention to abuses within the industry involving revenue sharing with colleges; gifts, including stock grants; and payments to schools for favorable treatment to the lenders, such as putting them on preferred lender lists.

Among the arrangements singled out were stock grants to student loan administrators at three major universities made by Education Lending Group Inc., a San Diego holding company acquired by CIT Group Inc. of New Jersey in 2005 for $381 million.

Education Lending Group’s main subsidiary is Student Loan Xpress.

Calls for interviews at CLC and Student Loan Xpress were not returned. CLC responded with a prepared statement from Joanna Acocella, executive vice president.

“Our designation as a preferred lender to colleges and universities around the country is a reflection of the first-class service and excellent financial resources we provide to students and families,” Acocella said.

Education Lending Group founder Robert DeRose said he couldn’t talk to anyone on the subject, and referred any questions to an attorney at Student Loan Xpress. A call was not returned.

Mark Kantrowitz, publisher of FinAid.org, a Web site providing information, advice and tools about student financial aid, said the amount of lending to students by private entities has exploded over the last decade as college enrollments increase, and the costs of education escalates.

“It’s a very profitable industry and there are economies of scale. The more loans you can originate, and the more quickly you can do it, the more profitable you can be,” Kantrowitz said.

In 2006, $67.3 billion in federal guaranteed student loans, or 15 million individual loans, were made to 8.5 million borrowers. In 1995, about 4.4 million borrowers took out 7 million loans, according to American Student Loan Providers, a trade group of private lenders in Washington, D.C.

Riding this wave of student borrowing are three relatively new San Diego companies, all specializing in federally backed student loans.

– Education Lending Group, founded in 2001, through its subsidiary Student Loan Xpress, now holds $4.6 billion in loans, according to 2005 data assembled by FinAid.org.

– College Loan Corp., founded in 1999, held $7.8 billion in loans as of 2005.

– Goal Financial, founded in 2000, had $5.3 billion in loans.

The common ground among the three lenders isn’t limited to their business.

DeRose and partner Marcus Katz launched a student loan business in the early 1990s before selling it to American Express. Katz and his son Ryan launched Student Loan Consolidation Center in 2000, a firm that changed its name to Goal Financial in 2004.

Ryan’s older brother, Cary, who previously worked at Education Lending Group with DeRose, launched CLC in 1999.

Calls to Goal Financial offices both here and to an office outside Washington, D.C., were not returned.

In response to the initial round of investigations, and allegations of improper stock grants to financial aid officers, CIT Group put three top managers of Student Loan Xpress on an administrative leave. They are DeRose, its vice chairman; CEO Mike Shaut; and Fabrizio Balestri, the president of the unit.

As all three companies have boosted their loan portfolios, so has employment increased as well.

CLC said it has 650 employees, including 433 working in Rancho Bernardo. In an interview last year, CIT Chairman and CEO Jeff Peek, in a visit to the headquarters of Student Loan Xpress in Carmel Valley, said he anticipated total employment at the end of 2006 to be 500, including 300 locally.

Last year, a Goal Financial spokesman put employment at 250 people but said it should rise to 300 by the end of 2006, with nearly all workers based in Mira Mesa.

Following the charges of collusion and financial gains by both financial aid officers and college, several other states launched investigations. Several private lenders and universities have agreed to pay settlements.

Cuomo said in statements last month that the payments to schools by lenders represents a conflict of interest, and may be illegal.

“Students and their families need to know about the practices in the industry so they can better protect themselves when being steered toward a lender by a college or university,” Cuomo said.

While both CLC and Student Loan Xpress are on a list of lenders given to students applying for financial aid at the University of San Diego, the list rotates each time a student checks the Web site, said Judith Lewis Logue, USD’s director of financial aid.

“We have a lender list but we don’t call it a preferred lender list,” Lewis said.

To get on the list, lenders are given a questionnaire that asks about the company, including how long the business has been operating, and what kinds of programs and benefits they provide.

Lewis Logue said she is aware some financial aid administrators have served on advisory boards of lenders, and receive expenses when attending meetings, but she has made it a policy to never accept membership on such a board.

“I’ve always seen it as a conflict of interest. I work for the University of San Diego and USD student and parents and if I were serving on one of those boards it would look like I was favoring one of those lenders.”

Once a student applies for financial aid, the college approves an aid package that can include grants, loans, part-time work, and other benefits. The student then selects a lender should a loan be necessary.

Students don’t know where to seek a loan, and use preferred lender lists provided by colleges. However, a student may obtain a loan from any lender, even if they aren’t on the list, Lewis Logue said.

To help determine which lender fits their needs, students can access data provided by an online site, Collegelenderlist.com, where USD posts information about the 16 lenders it has approved.

Although interest rates on federally backed student loans are set by the federal government, lenders offer different rates and benefits on origination fees, as well as other factors.

Kantrowitz said the current financial aid scandal will likely result in stricter regulations of an industry that has enjoyed fairly lax oversight in recent years.

“The schools and lenders have operated in an environment where there haven’t been clearly enforced standards,” he said.

But there’s a fine line in determining what type of relationship between schools and lenders is proper and what is unacceptable, Kantrowitz said.

“There’s nothing wrong with having advisory boards per se. The question is when advisory board members are being paid beyond actual travel expenses to attend meetings.”

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