Crib Sheet: Student Loan Industry
What makes a “preferred lender.”
By Nicole Vance, Iowa State University
Tuesday May 15, 2007
The student loan industry, which does $85 billion in business annually, is familiar to many students wrestling with the rising tuition costs of colleges and universities. With the recent front page stories about the complicated relationship between lenders and college financial aid offices, however, students are realizing there is a lot they didn’t know.
Many student loan providers have been offering incentives to universities and their personnel, presumably in hopes of inclusion on a list of "preferred lenders" given to students. The inducements are sometimes tied to the size of the loans and often include financial gifts, computers, trips, and industry-staffed call centers for financial aid offices.
Not-Necessarily-Preferred Lenders
University-endorsed lender lists do not always include the best options for students.
When students are looking for methods to finance their education, one of the first places they often look is the school where they plan to enroll, expecting to get unbiased advice. Yet universities don’t necessarily recommend loan providers solely based upon the interests of the student. The providers schools recommend are apparently not always chosen based on which rates are lowest or other factors that make lenders better for students. Instead, in some cases, it seems that lenders have gotten on preferred lender lists by offering perks to financial aid offices and their employees.
Conflict of Interest
Stock options for some administrators, fewer options for students.
If financial aid officials responsible for advising students on lending concerns hold stock in lending companies, there is reason to doubt that they will put the needs of the students first. Yet colleges everywhere seem to be abusing this trust: senior financial aid officials at Columbia University, the University of Texas at Austin, and the University of Southern California invested in Student Loan Xpress, a leading financial aid lender. And John R. Ryan, a chancellor at State University of New York served as a board member for Student Loan Xpress’ parent company, CIT Group Inc.
David Charlow, a financial aid official at Columbia University, personally owned $72,000 in Student Loan Xpress stock. Charlow also serves on the Board of Directors at Student Loan Xpress along with many other financial aid officials. They are offered stock options as members of these boards, allowing them to purchase the stock at reduced prices.
Fox in the Hen House
Lenders doing the work of financial aid offices.
Lenders often provide universities additional staff, especially during peak loan processing times, and students often don’t know whether they are dealing with a school employee or someone who works for a lender.
Nelnet and Sallie Mae even operate calling centers that field inquires concerning financial aid matters. While fielding student calls, employees sometimes identify themselves as school financial aid officers, not employees of private lenders. They deal with a wide range of student questions—including the selection of lenders. Some colleges, such as Texas Tech, defend this practice because it is cheaper than hiring additional staff for peak times. Yet lender employees have an obvious conflict of interest when it comes to many of the issues they will deal with.
Making DeLay Jealous
The trips, gifts, and other enticements lenders give financial aid officers.
From pens to Caribbean vacations, lenders often use gifts to influence and gain access to financial aid officers. While we all like free vacations, financial aid officers have a clear conflict of interest when they accept gifts from companies with business before the university.
Marketing Ploys
Exploitation of the university benefits.
Some lenders use university branding in order to seem student-friendly. For example, lenders will often use ATMs on campus that are branded with the university’s emblem or logo, making it appear that their loans are being offered by the college instead of a private lender. Some lenders print co-branded pamphlets and other materials for the financial aid office.
Some lenders have even abused a supposedly secure national database that identifies students’ financial situations. Private companies may have used this information to target students with direct mailings and other solicitations. The Department of Education restricted access to the database by loan companies and guarantors after shutting it down for two weeks.
Scholarships with a Price
Taking industry handouts in the name of conserving school financial aid resources.
Some schools defend their practices by saying that they pass savings on to the students through scholarships and opportunity loans. For instance, at Drexel University, "a revenue reinvestment that is being used for scholarships is really not a kickback," Executive Director of Financial Aid Melissa Englund told the student newspaper, The Triangle. The money, she said, is held in a special account to help students experiencing extraordinary circumstances, such as a death in the family.
The more students who borrow from a certain lender, the larger the package of scholarships the university receives from lender. These revenue sharing deals between financial aid office and lenders are a big incentive for schools to recommend the “generous” lender, and even to switch out of the government’s direct loan program. With direct loans, the federal government is the lending institution and there are no inducements of any kind given to schools. Direct loans are also a much more efficient use of federal subsidies, compared with subsidies to private lenders.
Recent Developments
The 110th House of Representatives took a step toward affordable higher education in January by passing the Student Debt Relief Act, while the Senate has held hearings on different aspects of the complex issue.
The Department of Education has sent letters to colleges reminding them that it is illegal to refuse to certify loans from eligible lenders simply because the colleges prefer other companies. The letter comes as officials in the New York State Attorney General’s office and in the U.S. Congress are subjecting colleges to scrutiny on how and why they encourage students to use particular lenders. Even though most colleges will certify loans from non-preferred lenders, they often do not give students the materials they need to shop around for the best rate before coming to a decision. Sen. Edward Kennedy (D-MA) launched a probe in March 2007 into sixteen student loan companies to determine whether their ties to universities violate appropriate standards. Kennedy is seeking documents showing whether they offered incentives to colleges in order to obtain favored status.
New York Attorney General Andrew Cuomo began his nationwide investigation in November 2006, focusing on lending companies such as Sallie Mae and NelNet. On March 23, Cuomo sent an intent to sue notice to San Francisco-based Education Finance Partners Inc. on the grounds of suspicious relationships they have with more than 60 schools.
And in terms of legislation, the Student Loan Sunshine Act, co-sponsored by Kennedy and Sen. Dick Durbin (D-IL), would limit the benefits to university officials. Similar legislation also has been introduced in the House by Rep. George Miller (D-CA). Financial aid offices and staff would be prohibited from accepting meals, trips, staff time, and other gifts worth more than $10 from lenders. Sen. Mike Enzi (R-WY) has introduced a bill dealing with the issue as well.
It is important for students to be skeptical and demand accountability from their universities. One thing you can do is determine if your school is involved in any unethical deals with student lending companies by using Campus Progress’s online guide to investigate.
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