By Jose Requena 

A story that has been developing these past weeks reveals an ugly side to the student loan industry. As has been reported in several media outlets, the $85 billion student loan industry is under investigation for giving university officials kickbacks for companies’ placement on “preferred lender” lists. The investigation, which began in the New York State Attorney General’s Office, showed (and continues to show) that students seeking financial advice from their schools would be referred to “preferred” companies regardless of better deals or lower interest rates elsewhere.

“Schools are using their position as mediators between students and companies for profit without letting students know they have other options,” says Luke Swarthout, Advocate of Higher Education for U.S. PIRG (Public Interest Research Group).

Since it first broke, the scandal has revealed a host of questionable ethics violations on the part of schools and student loan companies, ranging from the kickbacks first discovered to financial aid call centers that were staffed by loan company employees.

So far eight schools have agreed to reimburse students $3 million for the cost of revenue sharing agreements, and 22 have agreed to New York Attorney General Andrew M. Cuomo’s Code of Conduct, placing hard limitations on the lender/university relationship.

Since the Higher Education Act was amended in 1997, student loan companies have at their disposal a string of penalties and fees to use on defaulted student loan debt—including taking away the protections of bankruptcy. According to higher education advocates, regulating the relationship between educational institutions and these companies is only the beginning of the student protections need.

Last year’s Deficit Reduction Act cut away from several programs, including a $12 billion cut to student loan packages. According to U.S. PIRG, the measure “forces student and parent borrowers to pay excessive interest rates on their loans,” compounding the effect of students being steered toward lenders without regard to interest rates.

“Subsidy isn’t set by the market. Congress sets it,” says Swarthout. “Congress needs to address the student loan program for the benefits of students, not banks. They need to structure to subsidies for better results for the borrowers.”