In an effort to curb “deceptive practices” in the
$85-billion-per-year student loan industry, a set of new regulations issued
Nov. 1 by the U.S. Department of
Education requires colleges and universities to add a minimum of three
unaffiliated loan companies to the preferred lender lists they provide to
students.
Effective July 2008, these regulations follow an inquiry of
the college loan industry by New York Attorney General Andrew Cuomo, who
conducted a nationwide investigation in March into possible corrupt
relationships between universities and loan companies. Cuomo found evidence of
questionable practices, ranging from
stifled competition among the lending industry — resulting in a poor range of
loan terms — to discreet financial arrangements between colleges and lenders
that enriched loan companies at students’ expense.
He then contacted more than 400 colleges and universities
nationwide, requesting that they end relationships with lenders that coerce
students into entering loan agreements that are not in their best interest, or
that may have hidden consequences. Cuomo argued that universities should ensure
that students and parents understand that repayment benefits offered by a
“preferred lender” may not remain intact if the loan is later sold to a different
lender.
Cuomo also addressed other problematic relationships between
academic institutions and lending companies, including financial agreements
between schools and lenders such as revenue sharing, referral fees or
reciprocal benefits that were kept secret from potential borrowers.
The UCSD Financial Aid Office offers a list with eight
suggestions for loan companies. Though this type of list has been troublesome
in the past, UCSD Financial Aid Director Vincent De Anda said he believes that
the variety of lenders on the university’s list keeps options open for students
seeking loans.
“We have done our best to assemble a list of lenders that
offer stability and the best terms and service in the industry,” he said in an
e-mail. “Additionally, the list contains a mixture of different kind of
lenders, so that our students have a choice.”
The lenders recommended by UCSD are divided into two
categories: “tier one” and “tier two.” The first, labeled the “preferred lender
list,” contains three recommended lenders, while the second, dubbed the “other
approved lender list,” contains the remaining five.
The three options on the top-tiered preferred lender list
include a large financial institution, a nonprofit lender and a local lender.
To be considered for either list, loan companies must
fulfill requirements such as providing personnel and technology to improve loan
processing, as well as presenting timely and relevant information to staff and
students. Companies looking to be one of three choices on UCSD’s preferred
lender list must also provide a special electronic service that eliminates
paperwork, thus expediting loan processing.
De Anda said he sees preferred lender lists as a positive
component of financial aid, as long as they are constructed in the best interests
of the students.
“If done correctly, the list helps students avoid predatory
lenders and ‘fly-by-night’ lenders, who get in and get out with quick profits
and won’t be there when it is time to service the loan,” he said. “There has
been a marked increase on direct-to-consumer marketing, especially on the Web,
and I worry about students and parents obtaining loans from some of these
companies they know nothing about.”
Though UCSD compiles lists detailing lenders that it feels
will provide students with proper loan assistance, the Financial Aid Office
does emphasize that students can choose any loan company they desire.
Presently, UCSD conducts business with more than 30 different lenders.
The office distributes a letter authored by De Anda that
explains the process behind constructing UCSD’s preferred lender lists, and
informs students that they have every right to choose any lender whether or not
the lender appears on UCSD’s preferred lists.
This process helps to avoid a problem Cuomo listed as
evident in the student loan industry — financial kickbacks.
“Lenders pay financial kickbacks to schools based on a
percentage of the loans that are directed to the lenders,” Cuomo said. “The
kickbacks are designed to be larger if a school directs more student loans to
the lender. And the kickbacks are even greater if the schools make the lender
their ‘exclusive’ preferred lender.”
De Anda said that UCSD has no financial contracts with any
lenders on the preferred list, receives no “kickbacks” and does not share any
of the profits from student loans.
The new regulations requires that colleges ensure that three
unaffiliated companies are on their lender list, and disclose to students the
process by which these specific loan companies were chosen.