Senate Bill Would Exempt State Student Loans From 2007 Scandal Conflict Rules

A bill moving quietly through the Senate would let colleges steer students toward state-run and nonprofit student loans without triggering the federal conflict-of-interest rules Congress wrote after the 2007 financial aid kickback scandal.

Nearly two decades ago, investigators found that the people students trusted most to give neutral advice (their college financial aid officers) were quietly working for the other side of the table. Financial aid officers held stock in the lenders they recommended. Lenders paid schools a cut of the loan volume they steered. Some financial aid offices let lender employees answer their phones.

Because roughly 90% of families take whatever loan their school recommends, a single line on a "preferred lender" list was worth millions to a lender. It also cost borrowers real money, since the school's recommended option is not always the cheapest one.

The cleanup produced settlements, resignations, congressional hearings, and eventually a permanent set of federal rules. This proposed law would change the rules back for a small slice of the private student loan market.