How to ensure student loans make the grade

Gayle B. Ronan

As if borrowing money for college were not confusing enough, New York state attorney general Andrew Cuomo now charges that lenders and financial aid administrators are entangled in “an unholy alliance.”

Last week Cuomo charged the system is riddled with conflicts of interest, and Thursday he gave notice that he intends to file his first lawsuit in a broad and long-running investigation of the $85 billion industry.

Cuomo said he sent a notice of intent to sue Education Finance Partners Inc. in San Francisco. The company said it was “surprised and dismayed” by Cuomo’s announcement and is prepared to defend its business practices. EFP has five business days after receiving the notice to explain why it should not be sued.

Whether any laws were broken remains to be seen. But the blind faith parents and students historically have placed in their school’s financial aid advice is at risk.

And regardless of whether the alleged conflicts add to student loan costs, Cuomo’s message to borrowers is clear: Pay closer attention when choosing lenders and to the ultimate cost of a loan. In short, shop around. 

“While the federal government sets the maximum rate of interest on these loans, lenders are free to charge anything less than that maximum,” says Raza Khan, president and co-founder of MyRichUncle, a private student loan company headquartered in New York.  He feels too few borrowers realize they can use this competitive factor to their advantage.

Because lenders offer interest rate discounts and rebates that can save hundreds or thousands of dollars, borrowers should apply to several different lenders, suggests Mark Kantrowitz, publisher of FinAid.org, a Web site owned by Monster.com devoted to improving transparency in the financial aid arena.

Look beyond preferred-lender lists
“You are not required to use a lender from the college's preferred lender list,” explains Kantrowitz.  “Colleges are required to certify loans from all education lenders, even if they are not included on their preferred lender list.” Yet FinAid.org reports the first lender on a preferred list often receives 75 to 95 percent of that school’s loan volume. 

This is not entirely reflective of laziness or failure to explore options. Some schools have negotiated compelling deals with their preferred lenders on behalf of their students — using their pull with lenders to their students’ advantage. 

Other schools feature lenders who, though they may not be the "lowest cost" options for their students, offer what they feel is the highest-quality package in terms of service.

Then there are schools that may have ‘sold’ the positions on their lenders lists, typically receiving money or services used to help other students, including those who do not qualify for traditional aid.  These arrangements are not prohibited under current regulations, but they are rarely disclosed to parents and students.

In the case against Education Finance Partners, Cuomo says the company had arrangements with more than 60 colleges to reward the schools for sending it student customers.

As an example, Cuomo’s office said Boston University would get 0.25 percent of the net value of loans if the total reached more than $1 million. The reward level could rise to 0.75 percent for loans in excess of $10 million.

Colin Riley, spokesman for Boston University said the school is “providing information as requested by the attorney general” but declined further comment.

Other schools that had similar agreements included Baylor University, Clemson University, Duquesne University, Drexel University, Fordham University, Long Island University, Pepperdine University, St. John’s University, Texas Christian University, Graziado School of Business, Washington University and the University of Mississippi, Cuomo said.

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