April 12, 2007

Preferred Lender List FAQ

Posted in Student Loan News, The Financial Aid Process at 2:27 PM by Joe From Boston

The newspaper USA Today has a great FAQ article about preferred lender lists:

Sallie Mae, the nation’s largest student lender, agreed Wednesday to pay $2 million and to alter its business practices as part of a broadening probe of the student loan industry by New York Attorney General Andrew Cuomo. Much of Cuomo’s focus is on “preferred lender” lists offered by college financial aid offices. Here are answers to some questions about those lists:

Q: What is a preferred lender list?

A: Many colleges that take part in the Federal Family Education Loan Program recommend specific lenders to students who need loans to pay for college.

Students aren’t required to use a lender on their school’s list. But 90% of them do.

Many schools also offer preferred lender lists for private, or “alternative,” loans. These loans aren’t guaranteed by the federal government, and they typically carry higher rates than federal Stafford loans.

Q: How do colleges and universities decide which “preferred” lenders to recommend?

A: Financial aid officials say they weigh a variety of factors, including customer service and the lender’s record of handling complaints, says Mark Kantrowitz, a financial aid consultant and founder of the website FinAid.

The aid officials also consider so-called borrower benefits. For example, even though the top interest rate that student lenders can charge is set by the federal government — it’s now 6.8% — many lenders offer discounts to students who make a certain number of on-time payments.

Q: So why are preferred lender lists being investigated?

A: Cuomo says some lenders have provided inducements to schools and financial aid administrators to get on those lists, such as all-expense-paid trips to exotic locations.

Financial aid administrators at several schools have resigned after revelations that they received stock options from a lender that was on their school’s preferred list.

Among the most egregious financial inducements, according to Cuomo, are agreements that base the amount of a payout to a college on the number of borrowers who are referred to a particular lender.

Q: Given these revelations, what should students consider in choosing a lender?

A: The preferred lender list is a good starting point, but do your own research, too, Kantrowitz suggests. Your school can’t require you to borrow from a lender on its preferred list.

When comparing borrower benefits, “make a realistic decision of what is your likelihood of qualifying for that discount,” Kantrowitz says.

Some lenders, for instance, require you to make 48 consecutive on-time monthly payments to qualify for an interest-rate reduction. If you’re the type of person who has trouble balancing a checkbook, “chances are you’re not going to qualify for that discount,” Kantrowitz says.

In addition, don’t be afraid to ask potential lenders and your school about any potential conflicts they face.

In its settlement with the New York attorney general’s office, Sallie Mae agreed to a code of conduct that bars it from giving a college any financial benefits in exchange for a spot on the school’s preferred lender list.

Cuomo suggests that students check to see whether their colleges have adopted such a code of conduct before considering a lender on a school’s preferred list.


1 Comment »

  1. Indeed, take what you get from the financial aid office with a grain of salt and do the homework yourself on which lender to use. We just read an article in todays University of Texas -Austin campus newspaper that sheds some light on how preferred lender lists are formulated: http://college-loan-search.blogspot.com/2007/05/how-are-preferred-lender-list.html . We were most interested to see that “lender treats” appears in the scorecard that determines list determination.

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