Sallie Mae agreed to donate $2 million to the New York Attorney General's office and to modify its lending practices in a settlement it signed Wednesday.

Sallie Mae, the nation's largest student loan company, is the second lender to sign a settlement as a result of the New York Attorney General's ongoing investigation into practices related to higher education loans. Like Citibank and the higher education institutions that have settled with the Attorney General's office, Sallie Mae did not admit, and expressly denied, any conduct that violated law. The company also noted that no schools are being asked by the attorney general to return money resulting from their relationship with Sallie Mae.

The New York Attorney General's office will use the $2 million for its national fund for educating high school seniors and their parents about the financial aid process. The fund has raised $4 million through settlements with Sallie Mae and Citibank.

"We are pleased that Attorney General Cuomo has recognized Sallie Mae's leadership in the student loan industry and our ethical market practices with students and schools," Sallie Mae stated in a press release. "Sallie Mae has cooperated with this inquiry since its inception, and, as the industry leader, we have been confident throughout that our policies and procedures would stand tall."

Chairman of the House Education and Labor Committee George Miller (D-CA) applauded the settlement.

"Attorney General Cuomo's settlement with Sallie Mae demonstrates the value of vigorous oversight, and is an important step towards ensuring that all student lenders abide by the highest ethical standards," Miller said.

According to the settlement, Sallie Mae will have to abide by a code of conduct, which states the company must:

1. Not give anything of value (including revenue sharing, computer hardware below market price, and printing costs or services) to higher education institutions in exchange for any advantage provided for Sallie Mae's higher education loan activity, including placement on an institution's preferred lender list.

2. Not give anything of more than nominal value to higher education institution employees. Although institution employees who are not involved with the financial aid office or the instittuion's financial aid decisions are not prevented from working on a Sallie Mae board or advisory board.

3. Not reimburse expenses to higher education institution employees for service on any advisory board.

4. Not have employees staff an institution's financial aid office where the employee has contact with students besides general debt counseling. Sallie Mae must also ensure that its employees are never identified as a representative of an institution of higher education.

5. Not arrange to provide any "Opportunity Loans" (loans made to a certain number of students at an institution with poor or no credit history) in exchange for a specified loan volume from the institution or placement on the institution's preferred lender list.

6. 6. Take all commercially reasonable steps to ensure that if a loan is sold or the loan servicer changes, the loan will have the same (or better) benefits as the original loan. And, if Sallie Mae buys a loan it will honor the benefits promised by the seller or provide substantially identical or better benefits.

7. Fully and prominently disclose to potential borrowers any agreement with any unaffiliated entity to sell loans that Sallie Mae makes if Sallie Mae will no longer service the loan

8. 8. Disclose, at the request of an institution, the historic default rates of borrowers from that institution, the interest rates charged to borrowers from that institution in the year preceding the disclosures, and how many borrowers received each interest rate.

9. Fully and prominently disclose on its Web site and in marketing brochures that Sallie Mae is not affiliated with or part of the federal government.

In the settlement, the New York Attorney General alleged that Sallie Mae's acts, practices and omissions violated state Executive Law and General Business Law. The settlement highlighted some of these alleged practices, including:

• Sponsoring advisory boards comprised of individuals from financial aid offices and reimbursed board members for travel and lodging fees

• Providing personnel to some financial aid offices on a short-term basis at no charge to perform simple office tasks like stuffing envelopes and copying

• Providing call-center services to approximately 20 institutions with Sallie Mae employees answering the phone in the school's name

• Providing entertainment to institution personnel including reimbursement for travel and lodging to tour Sallie Mae's servicing facilities and operational headquarters

• Being listed on many institutions preferred lender lists, even though Sallie Mae paid no referral fees to any institution

• Providing Opportunity Loans to credit challenged, academically qualified students at certain institutions

• Contracting to purchase loans from approximately 40 schools that act as lenders to graduate and professional students, while also providing loan origination servicing and loan servicing to those schools.

Additional Media Coverage

Cuomo Bags A Big One (Inside Higher Ed)

Sallie Mae Will Pay Settlement Of $2-Million In New York Investigation Of Lenders' Practices (The Chronicle of Higher Education) A paid subscription may be required

Sallie Mae To Close Student Call Centers (The Wall Street Journal) A paid subscription is required

$2M Settlement For Sallie Mae In Probe (Associated Press)

Student Loan Giant Sallie Mae Settles In N.Y. Conflict-of-Interest Probe (The Washington Post)

Sallie Mae Changes Its Student Loan Ways (USA Today)

The Students Weigh In (Inside Higher Ed)

By Haley Chitty
NASFAA Assistant Director for Communications

Posted 04/12/07 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.