NJ sends subpoenas as student loan scandal spreads

By Kevin Drawbaugh

WASHINGTON (Reuters) - The New Jersey attorney general said on Friday he issued civil subpoenas to 61 colleges, 17 student loan firms and a state authority seeking information on potential misconduct in the student loan market, a target of widening investigations nationwide.

Attorney General Stuart Rabner said he is looking into "allegations that lenders have made improper payments to have colleges promote specific loan companies to students."

"Our investigation was launched to determine whether colleges have been improperly steering students to preferred lenders that don't have the best rates," he said.

The state-level inquiry adds to a growing list of official probes of an $85 billion business that plays a key role in helping students afford sky-high U.S. university tuition fees.

Rabner joins New York Attorney General Andrew Cuomo, other attorneys general and two committees of Congress in examining allegations of misconduct across the student loan industry.

Investigators accuse some college financial aid officers of taking questionable payments and perks from lenders in exchange for placing the companies on "preferred lender" lists shown to students looking to borrow money.

Rabner said in a statement he subpoenaed the state's Higher Education Student Assistance Authority and loan groups including Wachovia Corp. and Nelnet Inc..

In a related development, the inspector general of the U.S. Education Department has launched an investigation into potential conflicts of interest among department employees and student loan firms, the Democratic chairman of the House of Representatives Education Committee said on Friday.

The probe was requested late last month by California Rep. George Miller, who said in a statement he was pleased the department had agreed to start the inquiry.

"The Department of Education has an incredibly important responsibility to administer and safeguard our nation's federal education programs .... Students, families, and the American public deserve to know whether the public officials who have been entrusted with these programs are truly acting in the best interests of students and taxpayers, or for their own financial benefit," Miller said in a statement.

New York's Cuomo told Miller's committee last week at a hearing that the Education Department had been "asleep at the switch" in overseeing student loan programs, allowing corruption and conflicts of interest to spread.

U.S. Secretary of Education Margaret Spellings is scheduled to testify before the committee on Thursday.

Cuomo has been at the forefront of the conflicts of interest probe. As his inquiry has progressed, lenders including Citigroup, Sallie Mae, JPMorgan Chase and Bank of America have agreed to a code of conduct recommended by Cuomo banning school-lender financial ties and "preferred lender" list payments.

The Education Department in early April put financial aid office staffer Matteo Fontana on paid leave pending a review of his ownership of stock in a student loan firm.

A September 2003 regulatory document showed Fontana held thousands of shares in Education Lending Group, former parent of Student Loan Xpress, now owned by CIT Group Inc..