By Watson Scott Swail, President & Senior Research Scholar, Educational Policy Institute

The last few weeks haven’t been terribly good weeks for the student loan industry. In fact, the last year hasn’t been one to remember if you work at one of the loan agencies or associated institutions. Let’s take a brief review…

In May of 2006, Sallie Mae was skewered on 60 minutes for its business practices (oh, and the fact that its CEO is building a personal golf course). Sallie Mae can’t seem to keep out of the news these days, not with a potential $25 billion sale on the block that’s made top-of-the-fold newspapers across the nation.

Earlier this year, Nelnet (Nebraska Education Loan Network) was allowed to keep $278 million in federal subsidies it had received through an exploitation of a loophole in federal rules that allowed it to charge the government 9.5 percent guaranteed rate on student loans.

Last month, the US Department of Education (ED) suspended access to the National Student Loan Data System (or as we wonks would say, the “NSLDS”) because of unauthorized access by loan agencies who were using the database for things they shouldn’t have been using it for.

And, of course, the last few weeks has unearthed the “real” student loan scandal: improper kickbacks or privileged information to government officials and campus-based professionals. An ED official was placed on leave after finding that he bought and sold $100,000 worth of stock in a loan company (Student Loan Xpress). Financial aid administrators at three institutions were suspended after their own stock portfolios were exposed.

This was largely brought to the attention of the media by New York Attorney General Andrew Cuomo, who has led a charge against ethics violations in New York and beyond and testified before Congress earlier this week. It was Cuomo’s office that unearthed the ethics issues at several institutions. In response to these developments and Cuomo’s testimony, Senator Kennedy (D-MA), Chairman of the United States Senate Health, Education, Labor and Pensions Committee, requested US Secretary of Education Margaret Spellings to provide complete personnel files of Department employees to determine whether any ethics violations have occurred. This was followed yesterday by a request from Representative George Miller (D-CA), the chairman of the House Education and Labor Committee, to the Inspector General of the ED to conduct an ethics inquiry of Department employees.

And still, more students are forced to borrow to go to college and are borrowing more each year to make ends meet; all necessitated by continued double-to-triple inflation increases in tuition charges (sorry, “fees” for our California readers) at our nation’s colleges. None of this bodes well for higher education. Basically, it’s a bad year to talk about student loans.

We all want the loan industry to be pristine, but it isn’t. With the billions of dollars floating around, how could it? But my worry is the aftershock of these developments. Currently, most lenders do their best to help institutions work with students by providing materials and support in a variety of ways. If one talks to financial aid directors at the institutional level, they will say that this support is not only helpful, but almost necessary in order to meet the effort required to support entering college cohorts. In fact, I’ve had financial aid directors tell me that is the main reason they pick FFEL loans over Direct: to get the support.

The trick here is that there is a fine line between what level or type of support a non-governmental organization (whether non-profit or for-profit) can provide to institutions before they get called on the carpet for providing “inducements” to institutions. Inducements are funds or services provided to institutions, which would normally bear a cost to the institution, which is provided by the agency in exchange for their business. One can imagine this fine line: can a company provide free literature? Opportunities for professional development? Access to student loan expert advice? Campus-based support? Onsite consulting? Depending on how one couches it, all of these things are either legal efforts of support or inducements.

My organization, The Educational Policy Institute, has done and currently does work for a number of loan agencies, including TG, MOHELA, Edfund, Nelnet, NELA, and even Sallie Mae. In all cases it has been in a professional development model where we gave presentations at conferences or similar activities. In some cases we just work with the organization; others we present to student financial aid professionals. Our work has included studies of the impact of counseling on postsecondary access and the development of an effective practices database (to be released this May).

This latest scandal has the potential to seriously impact how we work with these agencies and colleges. As the leader of a non-profit organization, I’m not worried about our level or work and the contracts we get. But I am worried that we will not be able to conduct work that can help institutional personnel, financial aid and others, in the difficult work that do on a day-to-day basis. As Don Heller recently stated on InsideHigherEd.com, “We should be cautious not to throw out the proverbial baby with the bath water in responding to this scandal.”

Surely we need to tighten up on some requirements. The ethics issues pointed out by the New York Attorney General are truly serious problems and we have to clamp down on these issues. And Kennedy and Miller are also right to look into what is occurring within ED. But the truth is there are aberrant behaviors in this huge industry and we have to take Don Heller’s words to heart.

Let’s hope the year gets better for the student loan business because this boat can’t take much more water.