Colleges: Too Close To Lenders?

Regulators are looking at how schools steer families to favored creditors

Craig A. Green, director of financial aid at Westminster College in Salt Lake City, was incensed by a two-page ad that appeared in The New York Times on July 16. It accused schools of accepting cash and other benefits from lenders in return for throwing business their way. Since then, Green and dozens of other college financial aid officers have retaliated against the ad's sponsor, a small student loan company called MyRichUncle (UNCL ), by banning it from their conferences and, in Westminster's case, dropping it from their recommended lists. "They challenged our integrity," says Green.

Don't think this is just an intramural spat. If you have a child in college, the repercussions could have a big impact on his or her financial future. With the average price of a degree from a private college running $125,000, families are loading up on debt. The vast majority look no further than the handful of names on preferred-lender lists colleges compile to help students pick from among thousands of loan providers. While students aren't required to choose a preferred lender, many financial aid offices encourage them to do so, partly to ease their workloads. But shopping around could result in a better deal (table).

The controversy has helped propel student loans onto the radar screens of Congress and regulators. Senator Edward M. Kennedy (D-Mass.) is pushing a bill that would force schools to disclose gifts or benefits from lenders. The Education Dept. wants schools to list at least three lenders. And the New York Attorney General's office has requested information about preferred-lender lists from more than 60 colleges and 8 lenders, including Sallie Mae (SLM ) and Nelnet Inc. (NNI ), which say they're cooperating.


Many arrangements under scrutiny are tied to private loans. As the gap has widened between college costs and the $5,500 a year maximum undergrads can borrow in federal students loans, private loans, which often charge about four percentage points more, have come to comprise 20% of total borrowings, up from 5% a decade ago. As the private market expands, some fear potentially conflict-ridden practices could spread.

Financial aid officers contend that MyRichUncle has blown problems out of proportion to help its efforts to market directly to consumers. MyRichUncle President Raza Khan insists he acted out of outrage: "We opened a lot of people's eyes."

Among the incentives under fire are payments some schools receive from lenders based on the amounts students borrow in the private market. While it's illegal for schools to make money from students' federal loan applications, there are no such curbs on private loans. Education Finance Partners Inc., a private loan company in San Francisco, pays about 300 schools a percentage--under 1%--of student borrowings. The percentage rises as students borrow more. Many schools that list the company as a preferred lender, including Salve Regina University in Newport, R.I., Fordham University in New York City, and Lewis & Clark College in Portland, Ore., say they've used the funds for scholarships. The amounts involved, from $3,600 for Lewis & Clark to $26,000 for Salve Regina, are too small to influence their decisions regarding lenders, the schools say.

Still, two of these schools have recently stopped the payments. Fordham, which received $14,000 in one year, acted because of a "public perception that we are doing something inappropriate," says Angela Van Dekker, assistant vice-president for student financial services. After BusinessWeek contacted Lewis & Clark, it returned past payments and stopped future ones.


Schools also benefit from "opportunity" loans. In some cases, lenders set aside money so schools can direct private loans to students who would otherwise fail to qualify. Such perks can "be used as an incentive to encourage a school to put a lender first on a preferred list," says Mark Kantrowitz, publisher of Joyce Hall, executive director of Purdue University's division of financial aid, says at Purdue such loans are too few--only 154 of 39,000 students have one--to "be a primary reason to select one lender over another."

Also on regulators' watch list are practices that discourage shopping around. Lasell College in Newton, Mass., asks families not to apply to any lender other than Citizens Bank, which handles 90% of Lasell's federal loans. Doing so "will delay the processing and delivery of funds," its Web site says. "We don't restrict students' choices," says Michele R. Kosboth, director of student financial planning. Lasell uses an electronic system to certify loans from Citizens and paper for many others, which can lead to delays of up to a month.

Some schools even steer families away from certain lenders. Creda Camacho, director of financial aid at Montserrat College of Art in Beverly, Mass., told a MyRichUncle employee in a voice-mail on Nov. 30: "We do not work with MyRichUncle." Citing regulations that require schools to certify loans from a student's choice of lender, MyRichUncle appealed to college president Stan Trecker. "We initially erred in that response," Trecker told BusinessWeek. "We have made it clear to our financial aid staff that we need to be open to any lender."

By Anne Tergesen

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