U.S. shuts student database to lenders amid concerns

WASHINGTON (Reuters) - Following reports of abuse, the U.S. government on Tuesday temporarily barred college loan firms from accessing a database containing confidential personal information on millions of student borrowers.

The Department of Education said in a statement that the suspension of access was effective immediately and applied to "lenders, loan holders, servicers and guaranty agencies."

During the suspension, the department "will conduct a review of the specific uses of (the database) by these entities to determine if there has been unauthorized usage," said Secretary of Education Margaret Spellings in a letter to Sen. Edward Kennedy, a Massachusetts Democrat, who requested the suspension.

The Washington Post reported on Sunday that some college loan companies with access to the government-run database had used it in violation of federal rules, raising concerns about data mining and invasions of privacy.

Spellings said that the National Student Loan Data System contains borrower information such as names and birth dates. The Post reported that the database contained sensitive financial records such as loan balances.

Spellings said in her letter that the database was meant to be used solely to determine students' eligibility for college financial aid, loan collection and grant overpayments, not for the marketing of loans or any other products.

Only approved users in possession of students' Social Security numbers can access the database, Spellings said.

Since 2003, she said, the department has revoked 246 database access permits "due to suspicious activity" from users within the student loan industry. She said there was concern about an increase in use by lenders and other financial firms.

Troubles with the database come at a turbulent time for the $85-billion student loan business. Several state attorneys general and two committees of Congress are investigating financial relationships between university officials and student lenders that critics say pose conflicts of interest.

At the same time Kennedy and other lawmakers have introduced legislation that would change how the nation's complex student aid system works, directly threatening the business models of major lenders.

California Democratic Rep. George Miller said he was pleased Spellings was moving to address "privacy issues."

"However, it is long past time for the department to step up to the plate and vigorously investigate both the extent of lenders' misuse of the student loan database and the exploitation for profit of federal programs that are intended to help students and parents pay for college," Miller said.

In addition, earlier this month, Education Department official Matteo Fontana was put on paid leave while his stock ownership in a student loan company is reviewed.

Amid these troubles, Sallie Mae, the nation's largest student lender, said on Monday it agreed to be bought out for $25 billion by two private equity groups and two rivals -- JPMorgan Chase and Bank of America.