Is Your Financial Aid Foolproof?
Who can you trust these days? Financial aid officers—often viewed as the most reliable, trustworthy sources when it comes to finding the best lender for college loans—have recently come under scrutiny for their nebulous relationships with lenders. According to an ongoing investigation by New York Attorney General Andrew Cuomo's office, financial aid officers at colleges and universities across the country are accepting what Cuomo termed "kickbacks" in the form of gifts, vacations, and financial rewards from private lenders who end up on their school's "preferred lender" list. The investigation has pointed to financial aid officers taking payments from lenders like Student Loan Xpress, a unit of CIT Group (CIT); allegedly owning stock in student-loan companies; and getting paid to serve on advisory boards for these companies.
On Apr. 11, Sallie Mae (SLM), the largest student lender in the country, reached a settlement of $2 million with Cuomo's office—money that will go toward a student loan education fund. The Reston (Va.) lender also agreed to cease operating call centers and staffing operations for school financial aid offices as well as payments to financial aid officers for advisory board services and travel expenses. Sallie Mae—whose shares slid 1.6%, to $41.26—did not admit any wrongdoing in agreeing to the settlement (see BusinessWeek.com, 2/5/07, "Borrowed Time for Student Loans?").
The agreement comes on the heels of a similar $2 million settlement with Citibank (C) last week as well as a total $3.27 million settlement with eight universities over their financial relationships with lenders. The disclosures have unsettled the college financial aid community, resulting in much debate how regulations of such behavior can be hammered out.
First Place to Go
"The good thing about these investigations is a lot of these relationships will disappear," said Robert Shireman, executive director of the nonprofit Project on Student Debt. The bad thing: Trusting your financial aid office alone may simply not be enough when it comes to finding the most reliable lender out there.
Still, experts in college financial aid say that regardless of the perceived preferred lender conflicts arising from the recent disclosures, a school's financial aid office is the first place to go when investigating college loans. Justin Draeger, spokesman for the National Association of Student Financial Aid Administrators, said borrowers should be sure they are getting all the free aid they can from schools before turning to outside lenders—a move that might then make them ineligible for certain aid.
Shireman agrees that avoiding the school's advice initially is not a smart move. "The financial aid administrator is kind of like your doctor recommending a drug," he says. "You discover your doctor is getting kickbacks for prescription drugs, so you may be a little more careful. But you are still going to go to your doctor."
Creating a Sense of Urgency
Precautionary measures can be taken. Kalman Chany, founder of Campus Consultants and author of Paying for College Without Going Broke, says preferred lenders listed on a school's financial aid Web site shouldn't automatically be interpreted as those with the best deals out there for borrowers. Moreover, says Chany: "Students are free to use whatever lender they want to use."
Shireman recommends double-checking rates offered by a school's preferred lender with a financial institution where parents and students already have an existing account or relationship. Parents and students should feel free to ask financial aid officers how preferred lender lists were compiled, says Draeger, including explicitly asking whether financial aid officers have financial relationships with any of their recommended lenders.
Many schools create a sense of urgency by telling parents and students to submit loan applications as quickly as possible, cautions Chany, but students need not choose a lender by the May 1 deadline for accepting or declining financial aid offers. "Fear is a powerful motivator," says Chany. "The mentality of the schools is, 'We are dealing with 18-year-olds. They need to be scared to take action.'" But students and parents have anywhere between one and three months to shop around for a lender after accepting their financial aid package, and they can call a school's financial aid office to find out the exact deadline for submitting loan applications.
Doing Your Due Diligence
Understanding the differences between various federal loans—from 5% fixed-interest-rate Perkins loans to subsidized and unsubsidized Stafford loans at a fixed rate of 6.8%—is a critical step. The U.S. Education Dept. (http://studentaid.ed.gov) offers a guide to federal student aid that identifies and defines the range of federal loan options (see BusinessWeek.com, 6/27/06, "Five Ways to Manage Your Student Debt").
Cross-referencing rates on a lending comparison site can be useful, but such sites should not be the only place borrowers go. "There isn't a Web site that we are aware of that is without financial ties," cautions Shireman. Finaid.org, for example, is sponsored by Citibank and includes links to the lender's site.
A fixed-rate alternative to private companies—state-run lenders or education financing authorities—exist in a number of states, including Missouri, Massachusetts, and Connecticut. They often offer reasonable and secure rates that allow borrowers to avoid private lenders altogether, says Chany. Information on local education-financing authorities is available on state government Web sites.
Private loans should be a second choice to federal loans say the financial aid experts, as private loans are less transparent and often rely on variable rather than fixed rates. Borrowers should compare interest rates rather than payments, getting quotes from a handful of companies before settling on one, says Shireman. "It's very important to do your homework, not just what you're told," Chany says. "You need to slam the doors, kick the tires, see what you are getting into."