Senator Eliot Shapleigh - El Paso, Texas

As Jackie Diaz, assistant vice president of financial services at Baylor University, put it, the arrangement was "a win-win."

A student loan company paid the school a small percentage of each loan its students took out with the company. Baylor earmarked those payments for scholarships.

New York State Attorney General Andrew Cuomo had another word to describe such arrangements: kickbacks.

Cuomo's nationwide investigation of the $85 billion student loan industry, which has spawned congressional inquiries and other reviews, hasn't exactly been flattering for Texas colleges.

Texas Tech University, it turns out, hired a student loan company to field calls to its financial aid office, a fact that isn't disclosed to callers. Texas Christian University, like Baylor, accepted payments from Education Finance Partners Inc. The University of Texas placed its financial aid director on paid leave after Cuomo's office questioned his past ownership of stock in the former parent of a student loan company listed by UT as one of its preferred lenders. And Texas A&M University did not disclose to students that its financial aid director is married to an executive of a company listed as a preferred lender.

Many of the state's more than 150 public and private colleges and universities are reviewing their financial aid practices as the various investigations unfold. The UT System last week ordered its 15 academic and health campuses to stop using preferred lender lists, at least temporarily, while it examines lending practices.

The developments and allegations have been a wakeup call for higher education, said Mark Yudof, chancellor of the UT System.

"This area of the law apparently is going to evolve in the next year or so," Yudof said. "I don't know what law Congress will pass and what will be deemed appropriate and inappropriate by way of contacts with the student loan industry. I just hope we're careful in parsing between the guilty and the naive and between the guilty and the not guilty."

Officials of Baylor, a Baptist school in Waco, saw nothing wrong with their February 2006 agreement with Education Finance Partners, a San Francisco-based company that is moving the bulk of its operations to Austin. It paid Baylor 0.25 percent of loans it made to students. "It did seem like a win-win to me," Diaz said.

After Cuomo's office raised questions about the company's revenue-sharing practice with as many as 60 colleges, Baylor divided the $4,207.48 it had received — a figure Diaz has memorized "because this has been such a hot issue" — among students who had taken out the loans. That meant a needy student for whom the money had been earmarked didn't receive anything extra, she said.

Mike Scott, director of financial aid for Texas Christian, a private school in Fort Worth, initially regarded his school's arrangement with Education Finance Partners as perhaps the "greatest thing we've been offered. It's not costing the borrowers anything. EFP was just forgoing some of their profit."

The school received more than $13,000 in payments that it doled out to a couple of students, including one whose ROTC scholarship was running out.

"Once this all sort of blew up, my first reaction was, 'How dare you accuse us?' " Scott said. "As I think about it more, I realize the potential does exist for a school to misuse that. We didn't do a good job of explaining how this works to our customers. I honestly don't think for most of the schools there was ill intent involved. We looked at it as a way to get a little more financial aid for students."

Cuomo announced an agreement last week with Education Finance Partners under which the company will end its revenue-sharing arrangements and contribute $2.5 million to a fund for educating college-bound students about their loan options. The company said its payments did not affect the terms or costs of loans and were designed to help students with financial need. The payments went to the schools because they are in the best position to know which students have the greatest need, the company said.

"As a private industry supporting the not-for-profit education community, it is our obligation to give back to the community we serve," said Tamera Briones, the company's founder and chief executive. "The principle behind the revenue reinvestment program is core to the mission of our company, and we remain committed to supporting students."

In recent weeks, Cuomo has also announced multimillion-dollar settlements with two major lenders, Sallie Mae and Citibank, and with eight universities, none in Texas.

More than 100 colleges and lenders remain under investigation by Cuomo, and other states are considering similar inquiries. Cuomo held a conference call last week with officials from dozens of states and other jurisdictions to discuss possible collaboration.

A staff member of Texas Attorney General Greg Abbott's office participated in the call.

Paco Felici, a spokesman for Abbott, declined to say whether the office is looking into the student loan industry. "The office of the attorney general confers with other states on a number of issues, but we don't confirm investigations as a matter of policy," Felici said.

College costs rising

The heightened scrutiny comes at a time when loans are an increasingly large part of financial aid in the United States, mainly because state and federal grants — which, unlike loans, do not have to be repaid — haven't kept pace with rising tuition and other college costs.

Texas students rely more heavily on loans than their counterparts across the nation because the state Legislature historically has not been willing to chip in as much grant money as do other large states.

Two-thirds of the financial aid awarded in Texas for 2004-05 was in the form of loans, compared with 56 percent for the nation as a whole, according to a report issued last month by the Texas Guaranteed Student Loan Corp., a public nonprofit group established by the Legislature to administer federal loan programs. Most student loans in Texas are Stafford loans, which are backed by the federal government. If the student defaults, the federal government pays off most of the loan.

Colleges and universities are involved in virtually every step of the process by which a student applies for and obtains a loan. It wouldn't be practical to abolish college financial aid offices and centralize their functions, according to financial aid administrators and other specialists. For one thing, most colleges administer special scholarships established by donors that figure into some aid awards. Perhaps more important, student needs and backgrounds vary from campus to campus.

"You really need to be able to personally touch a lot of these students," said Lois Hollis, assistant commissioner for student services at the Texas Higher Education Coordinating Board.

Some schools have turned to student loan companies for help. Texas Tech hired Nelnet Inc., a student lender, in September on a one-year, $200,000 contract to field calls to its financial aid office. Although Tech's Web site notes that a company operates the call center, callers are greeted with a recorded voice that thanks them for calling "Texas Tech University's Student Financial Center" but makes no mention of Nelnet's role.

"We're not thinking about changing it this instant, but everything's up for discussion," said Sally Logue Post, a spokeswoman for the university. "They're working off our training, our script. Anything they can't answer kicks back to our financial aid folks. It allows our folks to have more one-on-one contact with students with problems or bigger questions.

"The call center does not in any way, shape or form push one lender over another," and Tech officials monitor to make sure, Post said.

Preferred lenders

Much of the controversy focuses on preferred lender lists.

Aid administrators say they compile such lists as a service to students and parents who want guidance. The preferred lenders, which vary from campus to campus, offer competitive, reliable service, the administrators say.

Lenders like to be on the preferred lists because that translates into a bigger slice of the loan pie. At UT, for instance, where students took out $232.8 million in loans for the current academic year, about 80 percent of the business went to the 20 lenders on the list.

Procedures for deciding which lenders are listed vary widely.

Baylor, which has had a preferred lender list for years, decided last year to trim it because it had swelled to 35 companies, and students were complaining that it was too hard to choose one, Diaz said.

The school invited lenders to submit proposals, including a detailed questionnaire with information on customer service and interest rates. Most lenders charge the maximum rate allowed by the federal government, currently 6.8 percent for Stafford loans, but many offer to shave that rate slightly or issue a rebate to the borrower. Often, such perks are contingent on the borrower making a certain number of payments on time.

After three months of review, Baylor's aid office came up with 19 preferred lenders for federally backed loans and eight for private loans, an increasingly popular option for students who are maxed out on government loans. Private, or alternative, loans are not government-backed and therefore have higher interest rates. Private loans accounted for about 20 percent of the $85 billion in new student loans last year.

"We had expected to cut it to 10 to 12, but we were comfortable with the 19 because they were all excellent lenders," Diaz said.

Texas Christian, Southwestern University in Georgetown and Texas A&M employed similar procedures to revamp their preferred lender lists last year. Rice University in Houston, with just five lenders on its list, takes a more informal approach, conducting an internal review each year based on service, benefits to borrowers and feedback from students.

UT's list also evolved informally, with Lawrence Burt, the financial aid director who is on leave, having made the final decisions after consultation with his staff.

Burt, who denies wrongdoing, has acknowledged owning stock in Education Lending Group Inc. at a time when he placed its subsidiary, Student Loan Xpress Inc., on the preferred lender list. Burt sold the stock in 2003, and Student Loan Xpress is now part of CIT Group Inc.

Burt says Student Loan Xpress was listed solely because it offered "a competitive product and good service, like every other lender on the list."

Don Davis, UT's acting director of financial aid, said the preferred lender list started about 12 years ago with the 12 largest lenders and gradually expanded to include some smaller companies that offer good service.

"It has to do with relationships and trust and knowing they can do the right thing for your kids," Davis said. "It wasn't rocket science. Maybe it should have been."

UT students are free to choose any lender. If a student seeking a loan doesn't select a lender, which rarely, if ever, happens, the aid office wouldn't make the choice for the student, Davis said. A little over a year ago, when interest rates were especially low, the office suggested that students consolidate their loans at the lower rates.

Barry Burgdorf, the UT System's general counsel, is reviewing conflict-of-interest questions concerning Burt as well as lending practices at the system's 15 academic and health campuses. He plans to issue advice on how to avoid "even the appearance of impropriety."

Zack Hall, a sophomore at UT who has amassed $17,000 in loans and expects his debt to total $40,000 to $50,000 by the time he graduates, said the bottom line for students is simple when it comes to preferred lender lists: "We need to know why they're telling us these are the lenders to choose."

Although the allegations of impropriety are troubling, Hall said, he's found the financial aid office to be a well-oiled, helpful machine. "The office of financial aid here at UT," he said, "is great."

rhaurwitz@statesman.com; 445-3604

UT's Office of Student Financial Services

Employees: 62

Students applying for aid: 30,000 per year

Students receiving aid: 24,000 per year

Aid for 2006-07: $351.2 million, including $118.4 million in grants and $232.8 million in loans

How a UT student gets a loan

• Student and parents fill out the Free Application for Federal Student Aid, typically online. A formula based on the family's income, assets and expenses yields the 'expected family contribution' toward the student's education.
  

• U.S. Department of Education reviews the application for completeness and accuracy and forwards it to UT.
  

• Based on what the family is expected to contribute and the cost of attendance, UT awards an aid package that could include a mix of grants, loans and work-study.
  

• Student decides which parts of the package to accept and which to decline or reduce.
  

• Student is free to select any lender. Until now, UT recommended 20 lenders for good service, but that list has been withdrawn in accordance with an order from the UT System to stop listing preferred lenders, at least temporarily.
  

• Lender, UT and Texas Guaranteed Student Loan Corp., a public nonprofit that administers the federal loan program, work together to get loan documents in order.
  

• Student fills out loan application and signs promissory note, a commitment to pay back the loan.
  

• Money flows electronically from lender through Texas Guaranteed to UT and then to student's account.
  

• Student begins paying back loan after graduation.

Source: Office of Student Financial Services, University of Texas