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For years, lenders enticed students to take out loans by splashing university names, logos, colors, and mascots on their advertisements – giving inexperienced borrowers the impression that the schools provided the loans.

Congress sought to ban the practice, known as co-branding, in a 2008 law and hailed it as a way to prevent lenders from misleading students.

“We are another step closer to ensuring that students understand the products they are buying to help finance their education, and that unfair and deceptive practices in this market are outlawed,” Democrat Christopher Dodd of Connecticut, former chairman of the Senate Banking Committee, said when the panel passed his version of the legislation.

But as often happens in Washington, when regulators write rules to carry out a new law, loopholes quietly emerge.

A mix of congressional ambiguity, regulatory initiative, and special interest lobbying has assured that co-branding can continue. And some students still may find themselves confused about the relationship between the sources of their financing and colleges that are required by the law to act in students’ “best interests.”

The law’s language left the scope of the co-branding ban open to interpretation by federal rulemakers, enabling the Federal Reserve Board to write a little-known guideline that exempts some lenders from the ban. So long as the lenders are endorsed by the school — recommended, for instance, on a list of “preferred lenders” — co-branded advertisements can continue. The advertisements must contain a disclaimer noting that the school isn’t actually making the loan.

Industry lobbyists reached out to the Fed as its officials drafted the rules. One week before the draft rules were released, the Fed’s senior attorney in charge of writing the student loan regulations received e-mails from lobbyists and spoke at an industry conference, internal Fed records show. Groups representing students and consumers, meanwhile, petitioned the Fed to strengthen the rules. Lobbying by both sides is permitted under Fed rules.

“There is a huge loophole that the Fed left in for banks that you could drive a truck through,” complained Christine Lindstrom, director of the higher education program of the U.S. Public Interest Research Group, one of several consumer advocacy organizations opposed to the Fed’s decision.

The actions of the Fed, the nation’s chief banking regulator, underscore how, months after headlines fade, federal bureaucrats can revise or weaken actions by Congress – especially when lawmakers don’t craft precise directions.

“Very often it’s difficult to discern with precision what Congress expects you to do,” said Gary Edles, an American University law professor and a former lawyer for four government agencies. “The real problem occurs because a lot of these laws aren’t precisely clear.”

Fed officials declined to comment for this story.

Co-branding lives on

Some lenders already are taking advantage of the co-branding exemption carved out by the Fed. The rules went into effect just over one year ago.

In one instance of co-branding, the financial aid website of Grove City College, a Pennsylvania liberal arts college, directs students to an ad for the “Grove City College Student Loan.” The ad, which resides on PNC Financial Services Group’s website, prominently features the school’s name, logo, and campus pictures.

The ad is permissible under the Fed’s rules because Grove City College recommends, or endorses, the large Pittsburgh-based bank to its students.

And splashed across the top in large, red lettering is, “Welcome Grove City College students and families!” Just below the greeting, PNC discloses: “The Grove City College Student Loan is not being offered or made by Grove City, but by PNC Bank, National Association.”

“PNC works to ensure students recognize that the bank, and not the school, is the lender when making education loans,” Frederick Solomon, a bank spokesman, said in an e-mail.

Roger Towle, Grove City College’s vice president for financial affairs, agreed. “We make it very clear that it’s a loan between them and PNC,” he said. He added: “We don’t get any payback or any kickback from the bank for doing this.” PNC is the only bank Grove City has officially endorsed to lend to its students.

For lenders who continue to co-brand, it could be a sweet deal.

“It would give them a 100 percent stranglehold on the market,” said Damian Kondrotas, former chief operating officer of University Financial Services, a once thriving student loan company. An endorsement from a school combined with the ability to co-brand means “you get to use the first- and second-best way of advertising,” said Kondrotas, whose company shut its doors shortly after reaching a settlement with New York Attorney General Andrew Cuomo in 2007 in which it agreed to stop co-branding with 63 schools.

The trouble stems from Congress, which sent a mixed message. The legislation allowed schools to endorse lenders by publishing lists of “preferred lenders” whom they recommend to their students. But it also outlawed co-branding “in any way that implies” the university “endorses” the loans.

In Washington, such ambiguities and contradictions are often left to regulators to resolve. In the case of co-branding, the Fed’s lawyers believe they were simply doing their job interpreting the fine print of a complicated, 431-page bill.

Did the Fed go too far?

Policy experts, lending industry insiders, and consumer advocates worry that the Fed went too far.

Student debt is skyrocketing. According to the latest figures from the nonprofit Institute for College Access & Success, college students are, on average, saddled with a record $24,000 in debt upon graduation.

“The Federal Reserve did not go as far as it should in protecting consumers from co-branding,” said Lauren Asher, president of the institute, a California-based nonprofit policy organization that urges making college more affordable.

Co-branding frequently caused students to mistake lenders for their school, Asher said.

That is what happened with Mike Palma, who graduated from Central Michigan University. In March 2007, while attending a school fair, he approached a booth labeled “University Financial Services,” which was draped in Central Michigan’s maroon and gold colors and staffed by sales representatives wearing the school’s sweatshirts, he recalls.

Palma said he signed up for a consolidation loan because he believed the salespeople worked for his school’s financial aid office. Only later did he learn they worked for University Financial Services, the Florida lender targeted by the New York Attorney General for its co-branding practices. Palma, who now works as an insurance salesman in Lansing, Mich., was able to get his loan canceled once he realized his mistake.

“They’re allowing these other companies to come in and completely use the trust that the school’s already earned and to sell their products,” Palma said of the Fed’s new regulations. “That’s just completely immoral and wrong in so many ways.”

Palma’s mistake could be a costly one for college students. The Fed’s rules apply to private loans, which typically charge higher interest rates than federal loans. For example, a federally subsidized undergraduate loan currently has a fixed interest rate of 4.5 percent, while a private loan often carries a double-digit interest rate.

“With private student loans, the sky’s the limit,” Asher said. “Interest rates are variable, there is no legal maximum, there are no constraints on how they determine what they charge you, and they charge more for people who can least afford them.”

Inexperienced borrowers like students can be easily swayed by private lenders who get to market their products with a school’s logo and colors, Asher said. Department of Education 2007-08 survey data analyzed by her organization shows about two-thirds of college students with private loans could borrow more from the cheaper, federal student loan program.

‘Unholy alliance’

College students have a dizzying array of choices to make when selecting a lender.

In theory, a selective list of preferred private lenders that has been carefully vetted and recommended by schools can save time and help students choose a reputable lender.

It’s also alluring to lenders. Those who make the top of a list can take between 75 percent and 95 percent of a college’s loan volume, according to 2007 Department of Education data analyzed by Mark Kantrowitz, the publisher of, a student financial aid information website.

In 2007, then-New York Attorney General Andrew Cuomo complained of an “unholy alliance” between some preferred lenders and universities. His investigation found that, for years, preferred lender lists were a source of abuse within the student lending industry, and he exposed instances in which lenders allegedly gave university officials gifts, trips, and stock compensation in exchange for inclusion on the schools’ preferred lender lists. Following the New York investigation, the nation’s six largest lenders and at least 28 schools agreed to alter some practices.

That same year, as Congress began mulling reforms to the student loan industry, several senators backed legislation to ban preferred lender lists.

Student lenders opposed an outright ban. And they delivered their message with the help of the Consumer Bankers Association, which advocates for lenders on Capitol Hill. All told, the bankers’ association spent about $2.5 million lobbying Congress, the Fed and other government agencies on various issues in 2007, according to Senate lobbying disclosure records.

As part of its lobbying campaign, the bankers’ association polled 2,500 college financial aid officers and found more than 90 percent of the aid officers did not believe banning preferred lender lists would be good for students, according to a press release at the time.

The banking group e-mailed the results to each member of Congress.

Financial aid officers did their own lobbying to keep preferred lists alive. The National Association of Student Financial Aid Administrators testified on Capitol Hill, wrote editorials, and urged its members to write to Congress to defend preferred lender lists.

“Institutions develop preferred lender lists to help families make informed decisions in the face of thousands of competing lenders and loan products,” A. Dallas Martin Jr., then the student financial aid group’s president, said in a letter to Cuomo.

In the end, the financial aid officers and the lending industry got their way. Congress explicitly allowed the use of preferred lender arrangements for private student loans – subject to new disclosure requirements about the criteria schools use for selecting the lenders and how the lender’s terms and rates benefit students. The law also banned the kinds of gifts and kickbacks Cuomo said he had uncovered.

But the compromise created the seeming contradiction in the law. Even as Congress allowed preferred lender arrangements, it outlawed co-branding. “A private educational lender may not use the name, emblem, mascot or logo” of a school, the law said, “in any way that implies that the [school] endorses” the loans.

The problem? “By definition, a preferred lender list is an endorsement,” explained Shelly Repp, a lobbyist and general counsel for the National Council of Higher Education Loan Programs, which represents lenders, loan servicers, collection agencies, and schools.

Lobbyists and the Fed

That left it to the Fed to interpret and write the rules – and to lobbyists to provide their own feedback.

As Brent Lattin, a senior attorney for the Fed, drafted the regulations, the lending industry sought his attention. On March 11, 2009, an industry representative e-mailed Lattin to congratulate him on an “excellent job” writing a first draft of the rules.

“Bravo! I have just finished reading the proposed regs and although I am sure that the industry will have a few things to complain about (we can always find something), I think you have done a very good job of making sure the consumer is well-informed while preventing unnecessary complications for the lender,” Winfield Crigler, executive director of the Student Loan Servicing Alliance, said in an e-mail obtained through a Freedom of Information Act request.

In an interview, Crigler said the Alliance’s interactions with the Fed centered on “very practical, operational concerns,” such as when preferred lenders would have to provide information about their loan products to schools. She said co-branding was not a big focus of Student Loan Servicing Alliance’s lobbying.

Lobbyists also had a chance to present their suggestions to the Fed’s Lattin in person.

He spoke at the Consumer Bankers Association’s Private Loan Workshop[j15] , a March 18, 2009 gathering attended by lobbyists and student loan executives. Repp, the lending industry lobbyist, recalls that industry insiders pointed out to Lattin the apparent contradiction between the co-branding ban and preferred lender arrangements.

The day after the workshop, a Wells Fargo assistant general counsel, Tom Levandowski, e-mailed Lattin to thank him for speaking at the event and invited Lattin to join an hour-long conference call with representatives from various student loan giants, including JPMorgan Chase & Co., Citigroup Inc., and student lender SLM Corp. which is better known as Sallie Mae.

The e-mail was “just part of our ongoing discussions, with a focus in this case on understanding the obligations of lenders in implementing changes to the student loan disclosure process,” said Erin Downs, a Wells Fargo spokeswoman.

The following week, the Federal Reserve Board published its proposed rules, including the one that exempted preferred lenders from the co-branding prohibition, and asked for feedback on its plan.

Room for abuse

During a two-month comment period, several lenders, schools, and consumer groups told the Fed it was making a mistake with a loophole allowing some co-branding.

The National Association of Student Financial Aid Administrators, which supported the use of preferred lender lists, urged the Fed to prohibit co-branding. “Even if an institution enters into a specific agreement with a preferred lender, the institution is unlikely to want the lender to use its name in marketing materials over which it has no control,” the group said.

Even some big lenders opposed the proposed co-branding exemption. Giant JPMorgan, one of the largest U.S. student lenders, told the Fed that the exemption was “contrary to Congressional intent” of the 2008 law and would conflict with most states’ codes of conduct for schools.

In the end, these arguments didn’t sway Fed officials. In July 2009, the Federal Reserve Board approved the rules, which included the co-branding exemption for preferred lenders. The Fed’s only concession was using the word “endorsed” instead of “preferred” to ensure that such lenders are actually given an endorsement by their schools.

With that endorsement, lenders can use the school’s logos, mascots or colors, so long as they publish alongside the advertising “a clear and conspicuous disclosure that explains the loan is “not being offered or made by” the school. The disclosure must be “equally prominent and closely proximate” to the co-branded image, according to the rules.

And what do key members of Congress say about the loophole in the ban they trumpeted? A spokeswoman for the then Democratic-led House committee that wrote the 2008 law said the panel supports the Fed’s interpretation and is content with some incremental progress.

“These rules are a big improvement because they will give student loan borrowers information that they didn’t have before,” said Melissa Salmanowitz, a spokeswoman for Democrats who are now the minority on the Education and Labor Committee. ”While lenders will still be able to use a school mascot or logo on marketing materials if the loans are endorsed or promoted by schools, lenders will also have to make clear that the school is not making the loan. This notification should prevent a student from assuming that a loan is made by their university.”

Consumer advocates worry the exemption could allow the type of confusing advertising that necessitated the co-branding prohibition in the first place. “These loopholes are worrisome and will be exploited to the full extent possible by very well-financed, aggressive marketers,” said Asher, of the Institute for College Access & Success.

Even some schools worry that the disclosures will make little difference to students looking to make a quick decision on their loans.

“Disclosures tend to be footnoted; they tend to be obscure,” said Nancy Coolidge, a policy analyst for the California school system. “There’s nothing as powerful as a visual symbol, particularly a nonverbal symbol.”

This is part of an occasional series of stories about student debt that began early in 2010. It was reported in partnership with Columbia University’s Stabile Center for Investigative Journalismand was supported in part by the Huffington Post Investigative Fund, which recently became part of the Center for Public Integrity.Julian Hattem and Ben Protess contributed to this story.

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