N.Y. probe casts doubt on `preferred' college lenders

Personal Finace

March 25, 2007|By Eileen Ambrose | Eileen Ambrose,Sun Columnist

Colleges soon will send out financial aid packages that will include billions of dollars in loans. Before borrowing, many parents and students will check the school's "preferred lender" list.

But the office of New York Attorney General Andrew M. Cuomo is investigating how these lists are compiled and whether undisclosed financial arrangements are undermining what's best for families.

Cuomo earlier this month released preliminary findings of an investigation into the $85 billion college-loan industry. And late last week, he announced his intention to sue a California loan provider over accusations of making illegal kickbacks to schools. The company says it plans to defend its business practices.

According to Cuomo, schools don't disclose how they come up with the preferred lender list, so families are not aware of potential conflicts of interest. Some lenders, for instance, pay kickbacks based on how much business the schools steer to the lender, Cuomo said.

Lenders also have picked up the tab to send college aid officers to ritzy resorts or provided other freebies, he said. And families, he added, are sometimes misled to believe that they must choose a lender from the college's preferred list.

Financial aid administrators agree that any abuse must be stopped, but they add such problems are rare. Schools develop "preferred lender" lists to help parents and students through the maze of borrowing, they say.

"The marketplace is saturated with options. ... It's hard to sort them all out," said Ellen Frishberg, director of student financial services at the Johns Hopkins University. "We've done a scanning of the marketplace, who's good at service and who gives good benefits. And now we're getting in trouble for this."

Hopkins is in the direct lending program, so students borrow directly from the federal government. The Baltimore university, though, compiled a list of lenders that offer the best rates and service for families seeking parent PLUS loans and private loans, Frishberg said. She said she hasn't heard from Cuomo's office.

Hopkins students borrow $50 million from the government each year, and lenders have noticed. Frishberg said lenders have dangled incentives for the school to drop out of direct lending or to put a lender on the preferred list. The university ignores the enticements, she said.

"We have ethics here," Frishberg said.

Cuomo said he released the early findings so that schools can correct any problems before aid packages go out this spring. His office also published a brochure to help families understand the loan process. It's available at www.oag.state.ny.us.

Apart from a house, a college education is the biggest purchase that most students and parents will make. Families owe it to themselves to know their rights and make sure they get the best deal.

"Remember not to forget your consumerism. Higher education is a business," said Kalman A. Chany, author of Paying for College Without Going Broke. Listen to what the colleges say, but do your homework, too, he said.

If the school is in the government's direct lending program, there's no choice. Uncle Sam is your lender.

But if you're attending a school outside the program, your options are numerous.

First, understand that a preferred lender list is only a guide.

"You are not obligated to borrow from a lender that's on the preferred lender list," said Mark Kantrowitz, publisher of FinAid, an online provider of student aid information.

Still, a college's preferred list can be a good place to start your research. Look at all the lenders on the list because discounts and benefits can differ widely among them, Kantrowitz said.

Ask the school how it came up with its preferred list, advised Sarah J. Bauder, director of financial aid at the University of Maryland, College Park.

Selection criteria

The university chose its lenders for their technology, pricing and customer service, Bauder said. For example, lenders waive upfront origination and guarantor fees that can cost a student 2.5 percent of the amount borrowed, she said.

The school also selected lenders that have been in the industry for at least 10 years and that keep their loans rather than selling them to another lender. That eliminates confusion and protects loan discounts from being lost, which can happen when loans are sold, she said. (The university adheres to state ethics rules that prohibit the kind of activities noted by Cuomo and hasn't heard from the attorney general, Bauder said.)

Next, look at what lenders not on the school list offer.

Kantrowitz recommends creating a spreadsheet with the names of the lenders, the discounts and what it takes to earn those benefits. "Focus on the [benefits] you can't lose and don't require you to jump through hoops," he said.

Upfront benefits are more valuable than those on the back end that borrowers might never see, experts agree.

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