Connecticut probes student loan industry: AG

By Svea Herbst-Bayliss

NEW YORK (Reuters) - Connecticut is investigating possible improper financial relationships between student loan companies and colleges and universities, its attorney general said in the latest move in a widening U.S. scandal.

"We have an ongoing investigation," Attorney General Richard Blumenthal told Reuters on Thursday, revealing for the first time that the state is probing the $85-billion-a-year industry.

Investigators for the state of New York have already discovered that some loan companies offered vacations and other perks to university officials to steer student borrowers their way. Some members of Congress have called for a federal probe and California Attorney General Jerry Brown is also eyeing the topic.

"Our office is looking into the issues and continuing to gather further information to get a clearer picture," said Gareth Lacy, spokesman for California Attorney General Jerry Brown.

Blumenthal declined to name the universities and colleges or loan companies his office is questioning but said, "We have been in contact with a number of schools." Dozens of universities and colleges are located in Connecticut.

He said the investigation seems to have "broader and expanding implications," but could not say what actions will be taken.

"Nothing is more egregious than increasing costs of education to students and families, who depend on the integrity and objective advice of school officials for decisions that may affect them for a lifetime," Blumenthal said in a telephone interview.

Earlier in the week, well-known hedge fund manager James Chanos told Reuters he expects investigators to discover "many tens of billions of dollars in fraud" at loan companies.

"We've only just scratched the surface," said Chanos, who runs Kynikos Associates, at the Reuters Hedge Fund and Private Equity Summit in New York.

Students and their parents, who often rely on advice from those officials on where to borrow money to pay for tuition, did not know about these arrangements.

"We are looking into whether there consultants fees were paid or board memberships were made or other things," Blumenthal said.

Earlier this week, SLM Corp.,the country's biggest lender to college students that is also known as Sallie Mae, said it will pay $2 million into a fund to educate students on financial aid to settle an investigation by New York State Attorney General Andrew Cuomo.

Cuomo also settled a case with Citibank, which makes loans to thousands of college students nationwide, and five universities -- New York University, Syracuse, St. John's, Fordham and the University of Pennsylvania. They agreed to pay $5.2 million.

"There is a chance for similar action here," Blumenthal said.

(Additional reporting by Jim Christie in San Francisco)