College "Preferred Lenders" List Not Always Preferable
Numerous colleges have created preferred lender lists in hopes of helping students who are new to the financial aid process. There are more than 100 lender options, and unbiased advice will prove beneficial to most students. In order to live up to any school’s standards of reliability, preferred lenders should be selected with care and impartiality. Listed lenders should naturally stand out for their ability to provide students with the least expensive and most comprehensive financial options. Because student loan rates tend to be similar, some schools say they also consider help availability, loan regulation clarity and client privacy when selecting lenders.
However, allegations of unethical, if not illegal, inducements have generated questions about the reliability of such lists. New York Governor and former Attorney General Andrew Cuomo has accused numerous schools and lenders of mutually benefiting from placing certain lenders on preferred lender lists. His concerns were justified: In 2007, Matteo Fontana, a general manager working for the Department of Education's Office of Federal Student Aid, was charged with misconduct for owning at least $100,000 worth of stock in Student Loan Xpress, a student lender giant and since then, over 100 schools and lenders were investigated in an effort to rid the financial aid process of this corruption.
Considering the high dependency on school lists (Cuomo stated that, "Ninety percent of the students take the 'preferred lender'"), it is important for students (both undergraduate and graduate) to be informed. It is not necessary to assume the worst, but choosing a lender requires some personal research. You may want to ask schools about options that go beyond their top choices.
There are a number of guidelines by which schools should abide when providing loan advice to students. If your school does not comply with any of the following, you might want to seek further details.
- If a school chooses to create a preferred lender list, a list of not-included lenders should also be available.
- Unreasonable processing delays should not occur as a result of students choosing lenders not on preferred lender lists.
- Schools should process all loan requests, regardless of which lender a student has chosen.
The Higher Education Act has also created regulations for student lenders. To be a government guaranteed, Federal Family Education Loan Program (FFELP) member, student lenders should abide by the following:
- Lenders should not secure customers by giving out loans that exceed, once all forms of financial aid are taken into account, a student’s cost of attendance. The cost of attendance takes into consideration tuition, fees, housing, food, and necessary school supplies/expenses.
- Lenders should not give financial aid administrators prizes, bonuses, or payments in exchange for placing them on preferred lists. Nor may they give incentives to financial aid administrators for persuading students to use their services.
- Lenders should not offer students, alumni, or other sales representatives inducements for convincing others to use their services.
- Lenders should not send unsolicited mail with loan application forms to students or their parents.
The recent revelations in the college funding industry will likely lead to additional, stricter, regulations. While assuming most schools are involved in misdoings is unnecessary, always check the fine print before you sign anything.
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