Political
Sallie Mae changes its student loan ways ; Deal aims to make process more openSource: USA Today 04/12/2007
Sallie Mae, the nation's largest private student-loan provider, agreed Wednesday to pay $2 million and to stop compensating financial aid officials with trips and other perks for serving on its student lending advisory boards. The lender -- which works with 5,600 schools and has nearly 10 million borrowers -- also agreed to stop running university call centers where its staffers often identified themselves as part of the university, rather than as part of Sallie Mae.
Its settlement with New York Attorney General Andrew Cuomo comes a week after Citibank, the second-largest private lender, also agreed to a $2 million settlement. Settlement money collected from lenders will be used to educate students and their parents about loans, Cuomo said.
"The lending industry works when consumer confidence is high, and people have to trust the product they're buying," Cuomo says of his inquiry into the student loan industry.
"Our position is very simple: Loan decisions should be made in the best interests of the students, and not in the best interest of the school."
Sallie Mae acknowledges that it operated call centers for universities and paid for trips for financial aid officials to visit its loan-servicing center and to attend advisory board meetings.
The exact financial cost to students isn't clear. But Cuomo says financial arrangements between lenders and schools could add hundreds of dollars to a student's loan costs.
Preferred lender lists
At the center of the investigation are "preferred lender" lists - - recommendations made by colleges and universities to student borrowers. For a lender, the list is a powerful marketing tool. More than 90% of borrowers select a lender from their school's preferred lender list, Cuomo says.
Financial aid administrators say that in compiling the preferred lender lists, they look at a lender's customer service record, how it handles complaints and borrower discounts. But Cuomo's office has alleged that other factors have influenced their choices, including:
*Stock options. Six universities are the subject of investigations into whether their financial aid officials owned stock options in Student Loan Xpress, a lender that was on their preferred lists. CIT Group, the parent of Student Loan Xpress, has placed three top executives with the division on paid leave.
*Revenue sharing. In these arrangements, a lender offers payments to a school based on the number of students referred to the lender. Some schools have defended these deals because the money usually goes into the school's financial aid program. Cuomo has argued that they're illegal kickbacks that inflate the price that students pay for loans. Six schools have agreed to reimburse $3.27 million to students who took out loans when revenue sharing agreements were in effect.
*Inducements. Cuomo and other critics have alleged that lenders cultivate financial aid administrators with sports tickets, trips to exotic locations and other perks.
*Call centers. Some lenders also operate call centers for universities, identifying themselves as part of the university financial aid office rather than as a student-loan company. Tom Joyce, a spokesman for Sallie Mae, which operated call centers for 19 universities, says company employees identified themselves as part of the university only when college officials asked them to do so.
(Sallie Mae was created as a government-sponsored entity in 1972 but is now a private company.)
Critics worry that such arrangements inappropriately steer students to certain lenders. "How can (financial aid personnel) be providing objective information when they are actually working for the lender?" Cuomo asks.
Dallas Martin, president of the National Association of Student Financial Aid Administrators, says he doesn't believe the practices Cuomo has criticized are widespread but acknowledges that "some of the things that have come to light over the last couple of weeks have given me pause." The investigation points to the need for more disclosure, Martin says.
Helen Nunn, director of financial aid at Susquehanna University in Selinsgrove, Pa., says lenders occasionally bring food and office supplies when they visit but that doesn't influence which lenders make the school's preferred list.
Still, "I don't think it's a bad thing that lending practices are being investigated," Nunn says. "It makes people walk a little straighter."
My Rich Uncle, an aggressive new lender, argues that arrangements between schools and lenders make it difficult for it and other entrepreneurial companies to offer borrowers a better deal.
The federal government sets the maximum interest rate for federal student loans, now 6.8%. But lenders are allowed to offer a lower rate. So last year, My Rich Uncle announced that it would reduce the rate on its Stafford loan to 5.8% once a borrower started making payments.
My Rich Uncle also took out ads urging students to ask financial aid officials about inducements from other lenders. The company says no school has put it on its preferred lender list.
Worries on campus
The investigation comes as high school seniors have received financial aid offers and are in the process of deciding which school they'll attend this fall. Steven Roy Goodman, a college counselor in Washington, D.C., says two families have told him they're more closely scrutinizing communications from schools, "because in their minds, if the financial aid office can't be truthful, then how is the rest of the university to be trusted?"
Students who have already taken out loans are also wondering whether they got the best deal available. Padmini Iyer, a Columbia University senior from New Delhi, says there "is a lot of awareness" at Columbia about the allegations.
Iyer didn't use one of Columbia's preferred lenders. But she says that if she needed to borrow more, "I'd be 10 times more careful."
James Boyle, president of College Parents of America, says he's received a handful of e-mails from parents about the investigation. He says he believes the probe will lead to a "more consumer approach to student loans, with the student and their family driving the process, as opposed to schools and their preferred lenders."
The investigation could also strengthen support for the federal "direct lending" program, which has been championed by Sen. Edward Kennedy, D-Mass., chairman of the Health, Education, Labor and Pensions Committee. Kennedy argues that the direct lending program is less costly for the federal government and free of conflicts of interest.
Direct lending schools don't have preferred lender lists. Students who attend those schools have only one option: borrowing directly from the federal government.
Critics of the direct lending program say that it's anti- competitive and that private lenders provide better service and benefits than the government. But Craig Munier, director of financial aid for the University of Nebraska, a direct-lending school, says the program allows his office to provide loans "ethically and without conflicts of interest."
Munier, who's chairman of the National Direct Student Loan Coalition, says his office still receives an occasional tin of cookies from a private lender. He says he removes the lender's name and puts the cookies out for students, or ships them to a homeless shelter.
"My colleagues will tell you that these little perks don't influence their decisions," Munier says. "My experience with banks is that they are pretty serious when it comes to money. If it's ineffective, why would they continue to do it?" "
No comments:
Post a Comment