Student loans a touchy business

Inquiry centers on relations with `preferred lenders'

April 16, 2007|By Gadi Dechter | Gadi Dechter,SUN REPORTER

This time every year, the financial aid office at Loyola College is inundated with calls from just-admitted students asking for advice on how to finance the university's more than $45,000 annual cost.

About two-thirds of Loyola students have to borrow to pay for college, and families often ask the school for help in choosing from the hundreds of lenders vying for a piece of the $85 billion aid industry.

"We do recommend certain lenders based on our experience with their loan servicing ... and also the interest rate and origination fees," said financial aid director Mark Lindenmeyer.

Such recommendations of "preferred lenders" are at the center of a national conflict-of-interest probe that threatens to tarnish the image of the student-loan industry. The investigation has frustrated aid officials, who say they are acting in the best interest of students.

Like Loyola, most colleges maintain lists of lenders they endorse as reliable sources of low-cost loans for students and their parents. Though colleges will typically process loans by any valid lender, a school's seal of approval is lucrative for a loan company because families tend to use companies recommended by their campus.

Colleges also can benefit from preferred lender relationships. At some Maryland schools, loan companies pick up the cost of printing financial aid brochures and other material. And they sometimes provide personnel to supplement financial aid office staff during peak periods.

At the University of Baltimore, preferred lenders pay for production of a folder given to financial aid applicants. "It is a significant savings, and it allows students to have something they wouldn't have otherwise," said Chris Hart, a university spokesman.

In such arrangements lie the potential for serious abuse, according to critics such as New York Attorney General Andrew Cuomo, who has been investigating relationships between colleges and preferred lenders.

Last week, Cuomo announced a $2 million settlement with the SLM Corporation, or Sallie Mae, the country's largest student lender, in which the company agreed to stop paying college financial aid officers who serve on its advisory boards and to discontinue the practice of providing staff support to schools.

Cuomo, members of Congress and the U.S. Department of Education are looking into whether undisclosed financial arrangements between schools and lenders undermine the best interests of students and their families.

The New York investigation led to the suspension of financial aid administrators at several colleges, including the Johns Hopkins University. Ellen Frishberg, director of student financial services, was put on paid leave while Hopkins looks into $65,000 allegedly paid to her - in consulting fees and tuition payments for a doctoral degree - by a preferred lender.

Cuomo also said he had concerns about revenue-sharing agreements between lenders and universities, including New York University and the University of Pennsylvania. In a multimillion-dollar settlement, the universities have agreed to return to student borrowers money that lenders paid the colleges in exchange for loan business.

Some of the colleges defended the agreements on the grounds that their share was funneled back into need-based financial aid programs.

The problem with cozy relationships between lenders and colleges, critics say, is that they might provide the schools with an incentive to steer borrowers away from nonpreferred lenders with better interest rates or lower fees. Though most student loans are federally backed products with interest rates capped by the government, private providers compete on fees, repayment terms and customer service.

While decrying alleged cash and stock payments by preferred lenders to some financial aid officers, many college officials believe Cuomo's investigation has unfairly impugned the financial aid profession and overstated the harm to students.

"I haven't received one question from one student or one parent, and I have not seen the harm," said Sarah Bauder, financial aid director at the University of Maryland, College Park, where seven companies are on the preferred lender list. "We're dealing with money. Any guidance that you can give students is beneficial."

Bauder said UM's preferred lenders are selected after her office conducts a formal review of the marketplace, analyzing both loan terms and the lenders' reputations for customer service.

Loyola's Lindenmeyer said recommending lenders protects students from unscrupulous banks that tack on hidden fees or resell their loans to companies without a proven track record.

Many advocates for borrowers agree that colleges should guide students and parents to reputable lenders. Families turn to financial aid offices for advice in navigating a complex system that leaves the average student borrower more than $19,000 in debt after graduation, according to the Web site finaid.org. Parents often are saddled with tens of thousands of dollars in additional loans.

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