Drexel University, which received more than $124,000 in commissions from a California lender accused of paying illegal kickbacks to schools, could become the first college to be sued in a nationwide probe into the $85 billion student-loan industry.
New York Attorney General Andrew M. Cuomo notified Drexel yesterday that he intends to sue the Philadelphia university over its revenue-sharing agreements with Education Finance Partners Inc.
Cuomo sent a "notice of intention to sue" to Drexel general counsel Carl "Tobey" Oxholm 3d saying that the university engaged in "unlawful and deceptive acts and practices" by promoting Education Finance Partners as its "sole preferred private loan provider." In return, the college got a percentage of the value of the loans students placed with the lender.
Neither Oxholm nor Drexel's vice president of university relations, Philip Terranova, returned calls.
Cuomo said Drexel received more than $124,000 from revenue-sharing agreements with Education Finance Partners and accrued $126,000 more through March 2007 that has not been paid.
Education Finance's agreement with Drexel dated April 1, 2006, called for paying the university 0.75 percent of the value of referred loans up to $25 million and 1 percent of all loans $25 million or more, Cuomo said. Drexel had an earlier revenue-sharing agreement with Education Finance Partners that began in May 2005 under which Drexel received 0.75 percent of all referred loans.
Since 2005, Drexel students received more than $16 million in loans from the San Francisco lender, Cuomo's office said.
Cuomo has been engaged in a wide-ranging investigation of the lucrative student-loan business. So far, three lenders have settled cases with the New York Attorney General's Office involving financial incentives to colleges or student-aid officials. None admitted wrongdoing, but all agreed to end the revenue-sharing practice and abide by a code of conduct drafted by Cuomo. At least seven colleges have agreed to reimburse students.
On Monday, Education Finance Partners agreed to end revenue-sharing and to pay $2.5 million into a fund to educate students about college borrowing. That lender has had revenue-sharing agreements with 60 colleges, including Drexel and Duquesne University.
Last week, SLM Corp., better known as Sallie Mae, agreed to pay $2 million into the fund. Citigroup Inc. will pay $2 million into the fund as well.
Seven schools - including the University of Pennsylvania, New York University, Syracuse University, Fordham University, Long Island University, and St. John's University - have agreed to reimburse students the money the colleges were paid by lenders in exchange for loan business.
Nearly 3,000 Penn students will receive reimbursements averaging $500. The reimbursements will apply mostly to graduate and professional students in the Penn CitiAssist loan program during the 2006 and 2007 academic years.
Penn, which collected a 2 percent fee from Citibank for each loan, said the $1.6 million it earned had been put into the financial-aid program.
At Drexel, the contracts and payments were not disclosed to students or their parents, and "created unlawful conflicts of interest," Cuomo deputy counselor Benjamin M. Lawsky wrote in a letter to Oxholm, Drexel's general counsel, dated yesterday.
Lawsky said Drexel allowed the lender to use the university's name, logo, colors and mascot in promotional materials, and included a link from Drexel's Web site to Education Finance's Web site, which "fostered the false impression" that Drexel was a "lender or lender partner" of the company.
Cuomo asked Drexel to respond within five business days and to also terminate any revenue-sharing arrangements. "Drexel must require lenders to compete for students' loans by offering the best loan products to students, not the best kickback to Drexel," Lawsky said.
Melissa Englund, Drexel's executive director of financial aid, said last week that the funds had been used "solely for student scholarships. Drexel has complied with all legal and ethical standards of the financial-aid profession," she said.
Englund did not respond to messages left yesterday.
"There is no reason for a school not to adopt the Code of Conduct," Cuomo said in a statement. "This office has been clear to schools: Settle, or we will commence litigation. Either way, we will get justice for students."
Cuomo spokesman Arthur Harris said the attorney general, who is investigating more than 100 colleges and universities nationwide, "believes that Drexel students deserve to be reimbursed."
"Drexel received over $100,000, which may be the most money EFP paid an individual school, and they have not settled," Harris said. "The attorney general has said repeatedly he thinks revenue-sharing is the most egregious of these practices, the most obvious and clear quid pro quo."
Cuomo claims jurisdiction over Drexel and any other colleges attended by New York students.
Contact staff writer Linda Loyd at 215-854-2831 or email@example.com.