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College "Preferred Lenders" List Not Always Preferable

Many colleges have 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 is the most beneficial to students. To live up to a school’s standards of reliability, preferred lenders should be selected impartiality. Listed lenders should stand out for their ability to provide students with the least expensive and most comprehensive financial options. Because student loan rates are similar, some schools claim to consider help availability, loan regulation clarity, and client privacy when selecting lenders.

However, allegations of unethical and illegal, inducements have generated questions about the reliability of preferred lender lists. New York Governor and former Attorney General Andrew Cuomo accused countless schools and lenders of mutually benefiting from placing certain lenders on preferred lender lists. 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. Since then, over 100 schools and lenders were investigated in an effort to rid the financial aid process of corruption.

Considering the high dependency on preferred lender lists (Cuomo stated that, "90% of the students take the 'preferred lender'"), it is important for both undergraduate and graduate students to be informed. Choosing a lender requires personal research. Ask schools about the options that go beyond their top choices.

There are a number of guidelines that schools should follow when giving loan advice to students. If your school does not comply with any of the following, seek further details.

  • If a school chooses to create a preferred lender list, make sure a list of not-included lenders is available.
  • Schools should have equal processing for lenders that are not on the preferred list.

The Higher Education Act has created regulations for student lenders. To be a government guaranteed Federal Family Education Loan Program (FFELP) member, student lenders must abide by the following:

  • Lenders cannot secure customers by giving out loans that exceed a student’s cost of attendance, once all forms of financial aid are taken into account. The cost of attendance considers tuition, fees, housing, food, and necessary school supplies/expenses.
  • Lenders cannot give financial aid administrators prizes, bonuses, or payments in exchange for placing them on preferred lists. Nor can they give incentives to financial aid administrators for persuading students to use their services.
  • Lenders cannot offer students, alumni, or other sales representatives inducements for convincing others to use their services.
  • Lenders cannot send unsolicited mail with loan application forms to students or their parents.

Recent revelations in the college funding industry lead to additional, stricter, regulations. Remember to always check the fine print before singing anything.

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Last Reviewed: October 2019