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Iowa Student Loan Liquidity Corp. has been ordered to repay nearly $15.8 million to the federal government because the nonprofit used illegal cash inducements - including payments to the Iowa State University Alumni Association - to secure more loan business, according to the U.S. Department of Education, which recently completed a review of Iowa Student Loan's records.
Federal law prohibits lenders from offering payments or other inducements to secure applications for loans. The ban is designed to remove any economic interest that may affect the school's objectivity as it advises students on financial assistance, according to federal documents. Members of Congress have said the intent is to protect students from convenient deals between lenders and colleges. As a result of such deals, students may end up with more loans than they need, or loan terms that are less ideal than if they had shopped around.
Iowa students carried the highest statewide average debt loads in the country for the class of 2007, at $26,208, according to the Project on Student Debt. The average debt carried by graduates that year from Iowa State University totaled $31,501.
An agreement dated June 2006 between Iowa Student Loan and the alumni association spells out that the lender would pay $35,000 per year for the deal, the report says. It would also pay $10,000 a year to help sponsor certain programs for seniors and new graduates. Iowa Student Loan would pay fees based on the number of completed applications generated by the alumni association's marketing activities, the report says.
Payment was on a staggered scale based on volume, documents show. If the alumni association generated up to 399 completed applications per year, the fee was $25 per application. But the fee rose as high as $75 each for more than 600 completed applications.
In a written statement, Iowa Student Loan board Chairman Tim Bottaro said the board believes the repayment amount was calculated incorrectly and should total $1.76 million. "As a board, we have discussed the U.S. Department of Education's findings and believe they are wrong. This latest interpretation of past rules dramatically contradicts the department's earlier documented guidance. This is why we intend to vigorously challenge these findings and are in the process of preparing a formal appeal," the statement continued.
Wrongful actions by a lender have the potential to jeopardize borrowers' federal benefits, such as guaranteed low interest rates, but the federal report states that will not happen in this case.
An investigation by The Des Moines Register in 2007 found that Iowa Student Loan was paying the Iowa State University Alumni Association money for efforts to exclusively promote Iowa Student Loan's consolidation loans. The alumni association marketed the loans in its member magazine, on its Web site and via a direct mailing list, the newspaper reported in May 2007. Alumni association President Jeff Johnson told the Register at the time that it had accepted $176,000 for the marketing. The new report does not specify how much Iowa Student Loan paid the alumni association.
