Attorney General Cuomo Expands College Loan Investigation To Direct Marketing Companies
New York, NY (October 11, 2007) - As part of an escalating investigation into direct marketing of college loans, New York State Attorney General Andrew M. Cuomo served subpoenas and document requests on thirty-three companies and lenders. The subpoenas seek information on the companies' use of misleading and deceptive tactics to entice young borrowers seeking college loans.
Direct marketing companies, many of which appear to be marketing middlemen for lenders, use direct mail, phone calls, television, radio and online advertising and personal contact to promote their loans. These companies directly target unsuspecting students with inappropriate marketing incentives and promotions. Cuomo is investigating whether these companies used deceptive offers, fraudulent solicitations or illegal incentives to lure students into applying for loans or loan consolidations. Such practices may violate New York State's consumer protection laws and the anti-inducement provisions of the federal Higher Education Act.
"The student loan industry is a very complex and confusing marketplace, and as students try to navigate its murky waters to get the best loan at the best terms, the last thing they need are sharks baiting them with glossy promotions and deceptive offers," said Attorney General Cuomo. "Students should be wary of such marketing and not allow it to deflect them from careful consideration of the merits of a company's loan offering."
The Attorney General's Office issued the subpoenas following an investigation of various direct-to-student college loan marketers, including EduCap/Loan-to-Learn, Affinity Direct/Educational Direct and three direct-to-consumer brands of First Marblehead Corporation (Astrive Student Loans, Laurel Collegiate Student Loans and Monticello Student Loans).
"Our ongoing investigation of the student loan industry has now shifted focus to the aggressive, misleading, and harmful tactics of many companies who market student loans directly to students and their parents. We are now concerned that as the bad practices surrounding the development of preferred lender lists are eliminated, we are seeing a spike in misleading and deceptive practices in the direct marketing segment of the student loan industry," said Cuomo. "Reforming the student loan industry requires investigation of all aspects of this market to ensure that one reform, like cleaning up preferred lender lists, is more than just a thumb in the dike causing the bad practices to shift to another area of the market. The practices we have found in the direct marketing of loans to students are surprisingly blatant and even involve some companies who portray themselves as arms of the federal government."
According to consumer advocates, loan companies are increasingly marketing loans directly to students, often bombarding young borrowers with direct mailings, telemarketing calls, and web or television advertising.
"Over the past year lenders have increased their direct to consumer student loan marketing. These pieces are frequently misleading, encouraging students to take out high interest, high risk loans instead of pursuing more affordable student financing options," commented Luke Swarthout, Higher Education Advocate, U.S. Public Interest Research Group.
A review of direct mailings, advertisements, and websites of marketing companies revealed that student loan marketing companies may use a variety of deceptive tactics to entice vulnerable borrowers, including:
Mailing phony offers designed to look like official letters issued by the federal government and operating deceptive websites designed to look like the federal government, including the U.S. Department of Education. American Student Loans Services solicitations, for example, claim to be from the Federal Student Loan Department, are stamped with an eagle insignia, and advise students to protect their rights as a student borrower by calling the company's toll-free phone line. American Student Loan Services, in reality, sells loan consolidation services. Subpoenas and requests inquiring into these types of practices were sent to American Student Loan Services, Class One Associates, Collegiate Funding Services/JP Morgan Chase, Federal Education Services, Elite Financial Group, Graduate Loan Associates and National Student Loan Center.
Mailing fake checks or false rebate offers on current loans to entice students to call the company's toll-free phone line. Academic Loan Group, for example, mails a $2,406.50 check and lists a toll-free phone line to entice students to call and confirm their eligibility to cash it. The check is fake, a deceptive tactic to entice students to place the call. Subpoenas inquiring into these types of practices were sent to Academic Loan Group, Goal Financial, Nelnet, Student Loan XPress, and Xanthus Financial Services.
Mailing and offering gift cards in amounts up to $500 as payment for testimonials, and in other instances, for the student's loan application. Erie Processing offers $400 gift cards as payment for student testimonials and loan applications, an offer the company refuses to honor when students call to accept. Instead, Erie aggressively attempts to sell their consolidation loans. Such gift cards violate the anti-inducement provisions of the federal Higher Education Act. Subpoenas inquiring into these types of practices were sent to Erie Processing, Federal Family Education Loan Processing, National Collegiate Lending Institute, and Post Collegiate Financial Services.
Offering gift cards that promise to pay students who convince fellow students to take out loans. SunTrusts website, for example, offers students $100 gift cards as payments for each student they refer who takes out a loan with the company. Offering these gift cards gives students an incentive to convince others to take out SunTrust loans, even if better loan terms are available from other companies. Nelnet offers $25 Simon VISA gift cards for recommending a friend. Such gift cards violate the anti-inducement provisions of the federal Higher Education Act. Subpoenas inquiring into these types of practices were sent to SunTrust and Nelnet.
Holding sweepstakes to entice students to take out loans with the company. Wells Fargo, for example, promotes a $25,000 sweepstakes to lure students into completing online loan applications. Academic Finance Corporation holds a $50,000 Giveaway Scholarship Sweepstakes, and MyTuition.com LLC has a monthly sweepstakes drawing for a free iphone. Such sweepstakes violate the anti-inducement provisions of the federal Higher Education Act when offered with federal loans. Subpoenas inquiring into these types of practices were sent to Wells Fargo, Key Bank, Academic Finance Corporation, My Tuition, Campus Door, Bank of America, Sun Trust and Wachovia.
Failing to disclose to students that the company may have plans in place to sell their loans. Many companies fail to disclose to students that they have agreements in place to promptly sell the loans they market. Loan sales can wipe out the borrower benefits associated with loans. Subpoenas and requests inquiring into these types of practices were sent to Axiom Direct, GE Money, GMAC Bank, GradeSaver, Key Bank, Think Financial, and Upromise.
Using false and misleading advertisements to entice students to visit the company's website. NextStudent, in its online advertisement, for example, deceptively claims that students can receive "$130,000 Fast" In fact, $130,000 is the aggregate amount students can borrow over four years in school. LendingTree.com, a bidding tool for consumers to obtain a mortgage, prominently uses the slogan "When banks compete, you win" to promote itself. Yet, until recently, students visiting Lending Tree's website expecting banks to compete for their student loan business were instead funneled to a single lender. Lending Tree failed to adequately disclose to unsuspecting students that it had an exclusive agreement with EduCap and essentially offered only its student loans.
Using seemingly neutral websites to gather personal information about students that is then sold to lenders without disclosing this fact to students. Xap, for example, operates several websites that provide students with information and admissions applications for colleges and universities. To access these materials, students must register with the sites and provide personal information such as name, mailing address, email address, date of birth, phone number, social security number and parental contact information. The website prompts also ask whether the student is interested in receiving information on student loans. Affirmative responses from students resulted in Xap selling the students personal information to lenders without disclosing the sale. The company had agreements with lenders, including Nelnet, to sell students and parents personal information gathered through its site.
"Direct-to-consumer marketing of various types of educational loans has emerged as the new frontier for predatory college lending practices," said Barmak Nassarian, Associate Executive Director, External Relations, American Association of Collegiate Registrars and Admissions Officers. "Lax oversight and non-existent enforcement have served as a huge incentive for unscrupulous lenders to ramp up their direct marketing operations. Left unchecked, these practices will leave an entire generation of Americans with crushing debt for life."
The Attorney General also released tips for students who are contacted by direct-to-consumer student loan marketers:
Be wary of companies whose materials create the impression that they are connected to the federal government. These are, in fact, private companies.
Watch out for companies that encourage you to take out private/alternative loans before exhausting federal loan options. Federally guaranteed loans, which include Perkins, Stafford, and PLUS loans, are lower-cost, fixed rate loans. Be sure to exhaust your federally guaranteed loan options before turning to more expensive private/alternative loans.
Recognize that many of the direct marketers are not lenders but merely middlemen.
Check with the Better Business Bureau to see whether other consumers have complained about the company you are considering.
Most importantly, always consider the merits of the loan offering rather than enticing promotions such as gift cards and sweepstakes offerings. Ask yourself: Would you buy a house because the builder offered you a $100 gift card or the chance to compete for a $5,000 prize? A student loan is no less serious an obligation that should be undertaken after careful deliberation and comparison shopping.
For students considering loans consolidation companies, the Attorney General offered the following advice:
Consider the advantages and disadvantages of loans consolidation before making a commitment.
Recognize that loans consolidation enables you to make one payment each month or reduce monthly payments by extending the repayment period. Remember, extending the repayment period increases the amount of interest to be paid over the life of the loan.
For borrowers with variable rate loans, understand that consolidating variable rate loans converts the loans into a fixed rate loan. Consolidation may result in savings over the life of the loan, since consolidation will spare you from future interest rate increases. On the flip side, once you consolidate, you will not be able to benefit from future reductions in the variable interest rate. (The fixed interest rate is equal to the weighted average of each consolidated loans' current interest rate, rounded up by 1/8 of a percent.)
For borrowers with Perkins loans, understand that consolidation may not be in you best interest. It may lead to losing your grace period and some deferment and cancellation rights. If you have a Perkins loan, part of your loan can be canceled if you teach or engage in certain other public or military service. If you consolidate your Perkins loans, you lose those rights. In addition, consolidating a Perkins loan through a FFELP lender, rather than through the federal government's Federal Direct Loan Consolidation program, will result in the loss of the Perkins loan interest subsidy during deferment.
To file a complaint, visit www.ag.ny.gov