February 7, 2007

Greater Scrutiny on Colleges and Ties to Lenders

Posted in Student Loan News at 2:43 PM by Joe From Boston

The state of New York is taking a closer look at how colleges pick schools for their preferred lender lists. Here’s an interesting article about what’s going on.

Greater Scrutiny on Colleges and Ties to Lenders
By JONATHAN D. GLATER Published: February 3, 2007

Colleges and universities from Massachusetts to California began receiving formal requests for information yesterday from the New York attorney general’s office as part of an investigation of financial relationships they or individual college officials have with student loan companies.

The inquiry by the attorney general, Andrew M. Cuomo, shows a sharpening focus by government officials on the often undisclosed relationships between loan companies and colleges and universities, particularly as tuition has soared and private student loans have become a lucrative, fast-growing business.

Senator Edward M. Kennedy, Democrat of Massachusetts and chairman of the Senate education committee, is taking aim at so-called preferred-lender lists, which college financial aid offices compile to recommend loan companies to students. Because students tend to rely on advice from those offices, getting on the list is crucial, and lenders use various tactics to curry favor with colleges and universities.

Mr. Kennedy is pushing a bill that would require the disclosure of such arrangements; ban gifts and services worth more than $10 to college employees; and require lenders to tell students that they might be eligible for low-interest federal loans.

The federal Education Department, which until recently paid relatively little attention to such practices, is now weighing whether to regulate preferred-lender lists, perhaps by requiring colleges and universities to include a certain minimum number of loan companies as options; some institutions have just one or two on their lists.

These combined efforts could pose a peril to some loan companies, which have flourished as private student loans, not guaranteed by the federal government, have grown at an average rate of 27 percent annually since 2001. Private loans now make up 20 percent of total education loan volume; students took out more than $17 billion in such loans last year, according to the College Board.

But the most aggressive action so far is by Mr. Cuomo, who has demanded information from eight loan companies, including Education Finance Partners and Sallie Mae, the nation’s largest student lender, and plans to query more than 60 colleges and universities.

“My office is seeking to ensure that students are being steered toward lenders offering the most competitive rates, not those who offer the best perks to schools or financial aid administrators,” Mr. Cuomo said in a statement.

In an interview, Tamera Briones, the chief executive of Education Finance Partners, defended her company, which has arrangements with several institutions in which it sends money to a college based on the amount students borrow, with payments increasing with loan volume. Ms. Briones said loan terms did not change based on whether an institution received such payments.

“What I believe will occur is, a thorough investigation will be done, and at the end of the day, I don’t believe that the attorney general’s office will find any significant wrongdoing,” Ms. Briones said.

She added that her company had cooperated with Mr. Cuomo’s office.

You can read the rest of the article here.