College Loans Scandal: Are You Getting the Best Deal?

By Pedro de la Torre, Campus Progress
Posted on April 26, 2007, Printed on October 6, 2008
http://www.wiretapmag.org/education/43091/

(Editor's Note: This story appeared originally on CampusProgress.org.)

Students, especially incoming freshmen, typically trust that financial aid administrators have their best interests in mind when they direct students to options available in paying for college. Usually this assumption is correct; most school officials care deeply about getting students the best deal possible, and work hard to make a complicated process as painless and fair as possible. However, recent investigations by the New York Attorney General's office and Higher Ed Watch have found that, despite so many good intentions, the financial aid system often has been corrupted.

The student loan market has ballooned to a whopping $85 billion annually. To get the biggest share they can of this enormous pie, many student loan companies seek to get on as many schools' "preferred lender lists" as possible. Preferred lender lists are created by college financial aid offices for student borrowers, and recommend a number of lenders for students to choose from when taking out a loan. Because students tend to borrow almost exclusively from the lenders included on this list, placement on the lists has become a lucrative marketing tool for many lenders.

If the lists were created through a transparent process that objectively determined which companies offer students the best loans and made the loan terms of each preferred lender clear to students so they could compare options, this approach list would be acceptable. Unfortunately this is often not the case.

Instead, lenders offer enticements to influence and gain access to financial aid officers. These have included Caribbean conference junkets for financial aid staff and deals where schools got revenue and scholarship money from lenders based on loan volume. Some schools allow lenders to field calls from students at company-run call centers. Students and parents contact financial aid offices for what they believe is unbiased information on financial aid options, but end up speaking to lenders who often fail to disclose that the person on the other end of the phone is in fact in the lending business and has a clear conflict of interest. In some cases, financial aid officers were even given substantial stock options by a student loan company that appeared on their institution's preferred lender list.

With college becoming increasingly unaffordable and loans becoming the primary way by which students pay for their education, students depend more than ever on the advice and guidance of the financial aid office. When lenders compete by buying their way onto preferred lender lists, rather than through lowering their rates and offering better services, both students and taxpayers lose.

The current student loan system is supported by an expensive and excessive system of government subsidies. This means that the government has substantial leverage in structuring much of the student loan industry. The Department of Education and Congress need to examine what they can do to make the system fair, transparent and cost-effective. When possible, lender subsidies should be cut, and these funds should be used for interest rate cuts, need-based aid and other efforts to make college affordable.

Under pressure as a result of investigations by the New York attorney general, many of the largest lenders, as well as a few schools, already have adopted voluntary codes of conduct. While this is great news for tens of thousands of students, many schools and most lenders have not changed their ways. It is up to students like you to find out if your financial aid office is working for the best interests of students, or if they have been more interested in benefits provided by lenders.

We have prepared a kit to help you figure out what questions to ask, and how to go about finding answers. We have also included news articles and other resources to help you put the issue in context. Our aim is to help student governments and organizations and campus journalists investigate their school's practices and policies, bring problems to the attention of the administration and student body, and to advocate for change.

Download our kit for exposing conflicts of interest at school financial aid offices by clicking here or visit Campusprogress.org.

Pedro de la Torre is an organizer at CampusProgree.org. If you have questions or would like help with this issue, please contact Pedro at Organize AT campusprogress DOT org. Campus Progress is interested in assisting student efforts to fix problems on their campus and within the federal financial aid system.

***********

For more background on the student loan scandal, check out these articles:

"Special Report: Student Loan Scandal" -- Higher Ed Watch
This resource includes an extensive list of newspaper articles, documents, original investigative reporting and other resources on the issue. Higher Ed Watch, which is a project of the New America Foundation, broke several of the important stories that brought this issue to the public.

"Lenders Ply Aid Officials At Schools With Free Stuff" -- Wall Street Journal
This article examines some of the "perks" that lenders use to entice financial aid officials.

"Sallie Mae Will Pay Settlement of $2 Million in New York Investigation of Lenders' Practices" -- Chronicle of Higher Education
This article looks into the settlement reached by New York Attorney General Andrew Cuomo and Sallie Mae, which is the largest student loan company in the United States. The settlement included $2 million to help educate high school students about paying for college, as well as a code of conduct with respect to its interactions with financial aid offices. The company, however, has already pledged to operate in the same manner.

"Crib Sheet: Direct Loans" -- CampusProgress.org
This article examines the two major federal student loan programs: the Federal Family Education Loan Program (FFELP) and the William D. Ford Federal Direct Loan Program ("Direct Loans"). The FFELP is the larger of the two programs and involves the government guaranteeing the loans that private companies originate. The Direct Loans, on the other hand, are provided directly by the government. The later is substantially cheaper for tax payers but opposed by powerful interests who give generously to political campaigns.

© 2008 Wiretap Magazine. All rights reserved.
View this story online at: http://www.wiretapmag.org/education/43091/