April 13 (Bloomberg) -- John Affleck-Graves, executive vice president of the University of Notre Dame, collected $58,984 last year in eight months as a director of Student Loan Corp., a lender to the school's attendees and their parents.

Affleck-Graves is one of 12 presidents, administrators, deans and professors at U.S. colleges and universities who serve on boards at nine of the largest publicly traded student-loan companies. Walter Massey, president of Morehouse College, got $649,692 in pay and stock in 2006 for serving on Bank of America Corp.'s board. The bank was chosen as an approved lender in a new Morehouse loan program and has since been dropped.

The paid positions were disclosed in filings with the Securities and Exchange Commission. The documents show that college officials hold board seats at financial institutions in an industry that lends $85 billion a year to students and parents. Until now, U.S. and New York state investigations have focused on consulting fees and other payments to financial aid officers from lenders that colleges encourage students and their families to use.

``This is an ethical earthquake,'' said Ian Mitroff, 69, professor emeritus at the University of Southern California Marshall School of Business in Los Angeles and a visiting professor at the University of California, Berkeley. Colleges, as institutions of learning, have ``a great burden to truly be smarter and do it better.''

SEC Filings

Among the 20 largest U.S. providers of student loans, based on Department of Education data, 13 are affiliated with publicly traded companies, which file reports with securities regulators. The public documents showed that of those 13, college executives serve on nine boards. The filings also listed their compensation. The companies include CIT Group Inc. and Wells Fargo & Co., and among the universities are Stanford, North Carolina and Nebraska.

``Preferred'' lenders are shown on Web sites that colleges and universities use to help students and families needing to borrow for tuition and expenses. The sites often don't explain how the institutions chose from the more than 3,000 companies that offer college loans.

About 80 percent of federally backed student lending is routed through banks. Preferred institutions account for 90 percent of borrowings, according to New York Attorney General Andrew Cuomo.

Notre Dame, where Affleck-Graves is executive vice president, identifies Citigroup Inc.'s Citibank unit on its Web site as a preferred provider of Stafford loans, the largest federally subsidized borrowing program. Affleck-Graves, 56, joined the board of Student Loan Corp., a publicly traded affiliate of Citigroup, last May, according to a company filing.

Kennedy Responds

U.S. Senator Edward Kennedy, a Massachusetts Democrat, has introduced legislation that would forbid college executives such as financial aid officers from taking gifts or consulting fees from loan companies. In response to questions from Bloomberg, spokeswoman Melissa Wagoner said, Kennedy will revise the proposed measure so that it will also ``prohibit college employee participation on any lender board.''

``You hope that colleges and universities would be the last bastion of integrity and ethical awareness,'' said W. Michael Hoffman, 64, executive director of the Center of Business Ethics at Bentley College in Waltham, Massachusetts. ``Surely these people would realize that there is a clear conflict of interest, or certainly the perception of a conflict of interest.''

Affleck-Graves discussed his appointment to the Student Loan Corp. board with the Rev. John I. Jenkins, the president of Notre Dame, in South Bend, Indiana, and decided it was important to have an academic official represent the interests of students and families, Affleck-Graves said in a telephone interview.

Affleck-Graves Comments

``We just felt that a lot of our students have loans and it was in our interest that the industry is well-managed and well- run,'' Affleck-Graves said. His board membership passed muster under a conflict-of-interest policy that applies to trustees, administrators and faculty, he said.

It's ``perfectly reasonable'' that lenders would turn to college officials for advice on ``how to provide better loan products to students,'' the National Association of Student Financial Aid Administrators in Washington said in a statement.

Citibank and Student Loan Corp., based in Stamford, Connecticut, help Notre Dame run separate loan programs for undergraduates, graduate and non-U.S. students. The programs, which made about $18.7 million in new loans for the 2005-06 school year, are described on Notre Dame's Web site as ``very competitively priced.''

Recommended at Notre Dame

The site ``strongly'' encourages borrowers with loans in both the federally subsidized and private programs to choose Citigroup, saying the bills can be combined in a single statement.

The initial decision to contract with Citigroup and Student Loan Corp. was made a decade ago and the terms are periodically renegotiated, said Joe Russo, 64, Notre Dame's director of student financial strategies. Affleck-Graves said he's never involved in any school decision about Student Loan Corp.

``We don't see a conflict,'' Affleck-Graves said. ``We have sufficient protections.''

At Morehouse, a historically black men's college in Atlanta whose graduates include Martin Luther King Jr., the school's Web site linked to six approved lenders under a new student loan program. One was Bank of America.

The decision to add Bank of America to the list of lenders ``will be reviewed by the audit committee of the college's board of trustees'' in keeping with Morehouse's conflict-of-interest policy, the college said in a statement issued April 10 in response to inquiries by Bloomberg.

Bank of America

Bank of America hadn't yet processed any loans for Morehouse students and ``will be removed from the approved lender list,'' Morehouse said.

Massey has been a director of the Charlotte, North Carolina- based bank since 1998. His pay from Morehouse in fiscal 2005, the most recent information available, was less than his Bank of America compensation last year. Massey received $382,895 from the school, consisting of $278,847 in ``compensation,'' $60,848 in contributions to employee benefit plans and $43,200 in expense account and other allowances, according to Morehouse's Internal Revenue Service filing.

Four business school deans also serve on the boards of the student lenders, SEC filings show. Robert Law Joss, 65, who heads the Stanford Graduate School of Business, has been a director of Wells Fargo since 1999. The bank, the fifth-biggest originator of student loans, paid Joss $228,895 last year, according to an SEC filing by the bank.

Stanford, Wells Fargo

Stanford lists San Francisco-based Wells Fargo as a preferred lender. The school, near Palo Alto, California, says on its Web site that the list is updated every two years and that banks are chosen on the basis of benefits such as customer service and a lack of origination fees.

Lenders recommended by Stanford to undergraduates are chosen by the university financial aid office, and Joss plays no role, said university spokesman Alan Acosta. The business school hasn't included Wells Fargo on its list for at least six years, he said.

``Stanford has a stringent conflict-of-interest policy that states conflicts are to be avoided and requires that business relationships must be disclosed,'' Acosta said in an e-mailed message. ``Dean Joss has fully complied with that policy.''

Another Wells Fargo board member, Cynthia Hardin Milligan, leads the business school at the University of Nebraska-Lincoln. Milligan, 60, received $199,495 from the bank last year, according to its SEC filing.

Nebraska makes loans directly to undergraduates, and Wells Fargo doesn't participate in its preferred lender program for graduate students, said Craig Munier, director of the university's office of scholarships and financial aid.

`Don't See a Conflict'

W. Steven Jones, 55, dean of the Kenan Flagler Business School of the University of North Carolina, earned $356,393 last year for serving on the board of Bank of America, according to an SEC filing.

``We don't see a conflict with the dean's serving on the board,'' university spokeswoman Lisa Katz said.

North Carolina works with a state-affiliated nonprofit agency, College Foundation Inc., as a preferred lender, and the foundation handles at least 98 percent of undergraduate and business school loans, Katz said.

Glenda B. Glover, 54, who heads the business school at Mississippi's Jackson State University, was paid $117,500 as a director of Student Loan Corp.

Jackson State lists the affiliated Citibank among 20 lenders on its Web site. The roster represents companies that have done business with the school's students, not a recommendation, spokesman Anthony Dean said.

CIT's Board

``The school is pleased when its faculty members are recognized for their expertise and sought by respected organizations,'' Dean said in a statement. ``There is neither a perceived nor real conflict in Dr. Glover's participation'' on the Student Loan board.

Much of the debate over alleged conflicts of interest has centered on CIT Group Inc., the largest independent commercial- finance company in the U.S.

Kennedy in an April 10 letter asked the Securities and Exchange Commission to investigate the sale of stock by the president of its Student Loan XPress unit to government and university financial-aid officials.

On April 9, New York-based CIT placed three Student Loan XPress executives, including president Fabrizio Balestri, on administrative leave. Cuomo, the New York attorney general, has subpoenaed CIT and Columbia University as part of a civil investigation.

CIT's directors include John R. Ryan, chancellor of the State University of New York. He collected $146,474 in pay and stock options from the company last year, according to an SEC filing.

`Greater Transparency'

Ryan, 61, ```stands by his service'' at CIT, he said in a statement. The arrangement was approved by the state's ethics commission in 2003 and again two years later, he said. SUNY supports Cuomo's efforts to ``achieve greater transparency in student lending,'' Ryan said.

CIT entered the student loan industry when it acquired Education Lending Group Inc. in 2005, after Ryan joined the board.

Some institutions in the 64-school SUNY system list CIT's Student Loan XPress as a preferred lender. All arrived at the decision independently, Ryan said.

Ryan is leaving the 414,000-student SUNY system in May to head the Center for Creative Leadership in Greensboro, North Carolina.

CIT's board also includes Thomas H. Kean, the former New Jersey governor who served as president of Drew University in Madison, New Jersey, from 1990 to 2005. Kean, 71, who is stepping down as director in May, first joined the board in 1999.

Sallie Mae

SLM Corp., based in Reston, Virginia, and known as Sallie Mae, is the largest provider of student loans. Since 1994, its board has included Diane Suitt Gilleland, 60, now an associate professor of higher education at the University of Arkansas at Little Rock.

She was appointed to the panel by President Bill Clinton when Sallie Mae was still a government-sponsored entity, and she was director of higher education in Clinton's home state of Arkansas.

``It's always valuable to have someone who is in higher education to provide that perspective to us,'' Sallie Mae spokesman Tom Joyce said yesterday.

Gilleland received $310,944 in total compensation last year, which included $138,628 in stock option awards, $100,000 in matching gifts to charitable organizations and $70,000 in salary.

Exercised Options

On April 3, Gilleland exercised options for 7,853 shares of Sallie Mae, making a profit of $143,816, according to an SEC filing. Gilleland didn't respond to phone and e-mail messages requesting a comment.

Joyce said Gilleland has ``absolutely no involvement'' in financial aid or student lending on the Little Rock campus and the company provided only $15,000 in new loans there this year.

``I have no concerns about UALR office of admission and financial aid and our relationship with lenders,'' Tammy Harrison, the school's admission and financial aid director, said in a statement. ``We have 60 lenders on our preferred lender list and we also work with students to process student loans for other lenders if they choose.''

Blackstone Group LP is considering a $20 billion takeover offer for Sallie Mae, a person familiar with the talks said today. Shares of Sallie Mae rose 15 percent, or $6.01, to $46.76 at 4:29 p.m. in New York Stock Exchange composite trading.

Other Directors

Other school-affiliated directors include John Casteen, president of the University of Virginia, at Wachovia Corp.; John Deutch, institute professor at the Massachusetts Institute of Technology, at Citigroup; Malcolm Portera, chancellor of the University of Alabama system, at Regions Financial Corp.; and Phail Wynn Jr., president of the Durham Technical Community College in North Carolina, at SunTrust Banks Inc.

The University of Virginia works with Bank of America, which handles 95 percent of the volume in its student-and-family loan program, spokesman Jeff Hanna said. The bank was selected from 15 candidates in 2003, and the job will be put out to bid again next year, he said.

Patti Richards, a spokeswoman for MIT, said the Cambridge, Massachusetts, school has ``extremely involved'' conflict-of- interest rules governing board service.

Kellee Reinhart, a spokeswoman for the University of Alabama system, said Portera adhered to a conflicts-of-interest policy and is stepping down from the Regions board next week.

A List Removed

Alabama's universities don't have preferred lenders, Reinhart said. A list of ``alternative lenders'' based on student feedback was taken off a Web site of the University of Alabama at Birmingham on April 10 to avoid giving the impression the school was endorsing the companies, said spokesman Dale Turnbough.

Durham Tech ``isn't involved in any way with loans to students,'' said Wanda Winslow, vice president for institutional support services. The two-year college emphasizes grants, scholarships and work-study opportunities, and for five years hasn't directed students to loans, she said.

`Doesn't Affect Durham Tech'

``For that reason, Dr. Wynn's work on the SunTrust board doesn't affect Durham Tech,'' she said.

Michael McCoy, a spokesman for SunTrust, said board members are chosen for their ``unique expertise, experience and perspective.''

``Any transactions or business relationships with directors are arms-length transactions and are fully disclosed in accordance with appropriate regulations,'' McCoy said.

Spokeswoman Shannon Bell at Citigroup couldn't immediately be reached. Carrie Ruddy at Wachovia and Rick Swagler at Regions Financial declined to comment.

Arthur Harris, a spokesman for Cuomo, said he had no comment on the role of college officials on the boards of lenders and said the attorney general's investigation was continuing.

Cuomo sent inquiries March 15 to more than 400 colleges and universities urging them to disclose potential conflicts in relationships with private lenders. Criminal charges are possible against high-ranking officials from both lending companies and universities, Harris said.

Cuomo's Investigation

The attorney general has been investigating financial aid officials at universities including Columbia, Johns Hopkins, Southern California and Texas who may have owned shares of, or accepted payments from, CIT's Education Lending Group. The schools have placed their aid officials on leave.

Sallie Mae on April 11 became the second company to pay $2 million to an educational fund run by Cuomo. Citigroup paid the same amount on April 2. The fund will be used to educate students and parents about school loans. Eight schools, including the University of Pennsylvania, will reimburse students $3.3 million for past loans and abide by a new code of conduct Cuomo developed.

Penn, which had a referral-fee arrangement for two years with Student Loan Corp., pledged last week to return $1.6 million to student borrowers. Citigroup's directors include former Penn president Judith Rodin, now head of the Rockefeller Foundation.

The U.S. Education Department put Matteo Fontana, a student- aid official, on leave last week after he was shown to have owned Education Lending Group shares in 2003.

To contact the reporters on this story: Matthew Keenan in Boston at mkeenan6@bloomberg.net; Brian K. Sullivan in Boston Bsullivan10@bloomberg.net.

Last Updated: April 13, 2007 16:55 EDT