Citigroup and the History of Student Loans

Citigroup is a major player in the financial services industry, with a history that intersects significantly with the evolution of student loans in the United States. Understanding this history requires examining Citigroup's role as a private lender, its involvement in controversies related to student loan practices, and the broader context of the student loan landscape.

Citigroup's Role as a Private Lender

Citigroup has been a prominent private lending institution, offering a variety of services tailored to college students and their families. Before applying for a college loan, there are important decisions to make, and Citibank has positioned itself not only as a financial provider but also as an advisor in the college selection process.

CitiAssist Student Loans

Citibank offered CitiAssist student loans, designed to meet the diverse funding needs of students. These loans aimed to provide benefits such as competitive interest rates, flexible repayment options, deferred payments until after graduation, and no limits on loan amounts.

Benefits of CitiAssist Loans

The CitiAssist Loan Program from Citibank offered distinct benefits to its student borrowers. These included:

Very low interest rates.
The ability to apply online, often receiving an immediate response.
The ability to borrow up to the full cost of tuition, less previously received financial aid.
Flexible payment options. Students may opt to defer repayment until after graduation.
No minimum borrowing limits. Students can borrow as small an amount of money as they need.
With consistent repayment, students could lower their interest rates by up to 0.75%.
Possible tax deductions on accrued interest, subject to state regulations.

Types of CitiAssist Loans

Citibank offered five different CitiAssist student loan packages, tailored to suit the needs of students with different financial challenges:

CitiAssist Undergraduate Student Loan: Undergraduates could borrow up to the total cost of their education, less any previously received financial aid, with deferred payment options. The loan interest was often tax-deductible.
CitiAssist Graduate Student Loan: Designed for students pursuing a professional degree, this loan offered flexible repayment plans, low-interest rates, and possible tax deductions.
CitiAssist Law Student Loan: Tailored to benefit students pursuing a law degree, this loan offered flexible repayment plans, low-interest rates, and possible tax deductions.
CitiAssist Bar Exam Loan: Specifically designed for law students in their third or final year, this loan helped cover review fees and living expenses while studying for the Bar exam.
CitiAssist Health Profession Loan: Students could borrow up to the full cost of their college tuition, less any previously received financial aid, with competitive interest rates, deferred repayment plans, possible tax deductions, and coverage for relocation expenses.

Cosigner Options

Since many college-bound students are just starting out in life, they might require a cosigner to be eligible for Citibank's student loan programs. Citibank offered a number of cosigner options for students and parents applying for higher education loans, helping students secure a loan and begin building a solid credit history while in college.

Controversies and Settlements

Citigroup's involvement in student lending has not been without controversy. One notable case involved a settlement with the Attorney General of New York State regarding preferred lender relationships with universities.

NYU Settlement

In 2007, then Attorney General Andrew Cuomo announced a settlement with NYU and Citigroup. NYU had placed Citibank's Student Loan Corporation (SLC) on a list of preferred lenders for students. However, it was revealed that Citibank was providing kickbacks to NYU, totaling $1,394,563.75 between 2002 and 2007.

Terms of the Settlement

Citibank was required to contribute $2 million to a national fund administered by the Attorney General's office to educate students about the student loan industry. Cuomo praised Citigroup for taking a "responsible choice" in cleaning up a system laden with conflicts of interest.

Conflicts of Interest

One significant conflict of interest was the fact that Martin Lipton, chairman of the NYU Board of Directors since 1998, had legally represented Sanford (Sandy) Weill, Chairman and CEO of Citigroup, since the mid-1980s. Lipton's law firm, Wachtell, Lipton, Rosen & Katz, had also advised Weill on circumventing the Glass-Steagall Act to merge his Wall Street brokerage firm with a bank holding insured deposits.

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Second Selection as Preferred Lender

Citibank's Student Loan Corporation was named a preferred lender at NYU for the second time in 2004, one year after Citigroup settled charges with regulators for rigging stock research. By this time, Lipton, as Chairman of NYU's Board, was well aware of Citigroup's problems.

Impact on Students

The preferred lender arrangements and other practices within the student loan industry have had a significant impact on students.

Student Experiences

Students have reported being misinformed and manipulated by lenders. One NYU student, Sarah V., stated that she received a letter from NYU recommending Citibank as a preferred lender and was offered $26,000 per year in loans from Citibank. Another student, Gina K., claimed that her loan payments were far higher than estimated.

Confusion Between Federal and Private Loans

There is often confusion between Federal student loans and private student loans. Subsidized Federal loans (Stafford loans) defer payments until after graduation and charge zero interest while the student is in school. Private banks like Citibank, however, compound interest over the four years, leading to a significant increase in the amount owed by the time the student graduates.

Bankruptcy and Hardship

Under the 2005 bankruptcy reforms, it is difficult to discharge student loan debt in bankruptcy. If students request a forbearance for hardship from private lenders, interest continues to compound, exacerbating the problem. Defaulting on private loans can lead to wage garnishment and a ruined credit rating.

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Government Profits on Student Loans

Senator Elizabeth Warren reported that the government is making substantial profits on student loans. She introduced legislation to allow students to borrow at the same interest rate that Wall Street banks pay when they borrow from the Federal Reserve.

NYU's Financial Aid Practices

NYU's financial aid practices have also come under scrutiny. One high school valedictorian who applied to NYU received a limited scholarship and work/study offer, with the balance structured as loans, forcing the student to withdraw.

Citigroup's Financial Performance

To understand Citigroup's involvement in student loans, it is important to consider its overall financial performance and strategic decisions.

Key Financial Metrics

Citigroup's financial results provide insights into its operations and profitability. In 2012, revenues were $70.2 billion, down 10% from the prior year. Net income was $7.5 billion, compared to $11.3 billion in the prior year.

Strategic Decisions

Citigroup has made strategic decisions to streamline its operations and focus on core businesses. This has included reducing its presence in certain markets and divesting non-core assets.

Citi Holdings

Citi Holdings was established to manage and dispose of non-core assets, including local consumer lending and mortgages. The goal was to reduce risk and improve Citigroup's overall financial performance.

Capital and Liquidity

Citigroup maintains a strong capital position to withstand economic challenges and meet regulatory requirements. The company closely monitors its capital ratios and liquidity levels.

Regulatory Environment

Citigroup operates in a complex regulatory environment, and changes in regulations can impact its business and financial performance. The company is subject to various capital requirements and risk-based capital guidelines.

Historical Context: The Evolution of Student Loans

Understanding Citigroup's role in student lending requires a broader historical perspective on the evolution of student loans in the United States.

The Higher Education Act of 1965

President Lyndon B. Johnson's Higher Education Act of 1965 aimed to make college accessible to everyone through federal scholarships and loans. This act was intended to combat racial injustice and poverty.

The Rise of Sallie Mae

Sallie Mae was established to create a market for federally backed student loans. It was initially viewed as an enlightened expansion of Johnson's program.

Privatization of Sallie Mae

In 1996, Sallie Mae was privatized, removing restrictions on its ability to acquire other loan issuers and issue federally guaranteed loans. This privatization had a dramatic impact on the student loan industry.

Albert Lord and Sallie Mae's Growth

Under CEO Albert Lord, Sallie Mae experienced significant growth. The company undermined the Education Department's direct loan program through marketing and incentives to colleges. Sallie Mae also began marketing private student loans.

Sallie Mae's Political Influence

After privatization, Sallie Mae became a powerful political force in Washington, lobbying the Department of Education and contributing to political campaigns.

The Impact of State Funding Cuts

Declining state support for higher education has led to increased tuition costs, forcing more students to borrow. This has contributed to the growth of the student loan industry.

The Role of Debt Collectors

As borrowers struggle to repay their loans, the debt collection industry has grown. Complaints about overzealous debt collectors have increased, and federal and state agencies have fined contractors for misconduct.

Bankruptcy Law Changes

Changes to bankruptcy laws have made it more difficult for student debtors to discharge their loans, further burdening them with debt.

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