Student loan maker Nelnet settles with New York for $2 million

By Josh Funk

OMAHA, Neb. – Student loan company Nelnet Inc. has agreed to pay $2 million and will quit offering two services as part of a settlement with the New York state attorney general’s office.

Officials at the Lincoln-based company disclosed the settlement Tuesday in a call with financial analysts. Nelnet agreed to abide by an industry code of conduct developed by New York Attorney General Andrew Cuomo.

Nelnet officials also predicted Tuesday that the student loan business will become less profitable once new rules Congress is considering are approved, which could hurt borrowers.

Cuomo has led an investigation into conflicts of interest in the student loan industry. He has reached settlements with 11 other lenders, including Citibank, Sallie Mae, JP Morgan Chase and Bank of America, and fines paid by the companies will be used to educate students about financial aid.

In April, Nelnet acknowledged “very small” mistakes in some dealings with colleges, including paying $4,800 to Western Illinois University for referring students to the company for private loans, the Nebraska attorney general’s office said.

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The code of conduct is similar to one Nelnet announced in April, but it adds prohibitions of two services that Nelnet has offered: loan consolidation service agreements with alumni associations and answering financial aid questions on behalf of universities.

Earlier this month, Nelnet announced plans to end agreements with 110 alumni groups by mid-August and stop paying the groups for using member lists. Nelnet president Jeff Noordhoek said Tuesday the company is looking for a buyer for its phone service that handled financial aid questions.

“We are pleased to put this inquiry behind us and move forward,” Noordhoek said.

Universities have paid Nelnet to respond to financial aid inquiries from students. If borrowers or potential borrowers ask questions about loans, Nelnet employees will transfer the call back to the school’s financial aid office to avoid any conflict of interest.

Noordhoek said neither the call center nor the alumni agreements provided significant revenue to the company, so ending them won’t have an immediate effect on the company’s earnings. But he said customers valued those services.

Cuomo’s office said in a statement that Nelnet’s practices are representative of deceptive practices in the industry. Nelnet was paying for exclusive access to student borrowers, and those payments were not disclosed, Cuomo’s office said.

Schools and alumni groups would recommend Nelnet because they were being paid to do so, and not because Nelnet offered the best terms, Cuomo’s office said.

“By paying for exclusive referrals of their loans, Nelnet violated the trust that students and recent graduates place in their schools and alumni associations,” Cuomo said.

In Congress, lawmakers have given preliminary approval to bills that would cut roughly $18 billion in federal subsidies to banks that issue government-backed student loans, restructure some federal loan programs and address conflicts of interest in the student loan industry.

Nelnet’s Noordhoek said those changes will mean lower profits for lenders; he said loan yields would drop 65 to 75 basis points.

That will force some lenders out of business, he said, and ultimately hurt competition.

Both the Senate and House have passed a version of new student loan rules, and lawmakers are crafting a compromise bill.

Nelnet says it serves students in 50 states, has about 3,500 employees and $26.2 billion in net student loan assets.

Shares of Nelnet fell $2.42, or 12.3 percent, Tuesday to close at $17.30.