Help! How can I stop student loan marketers?

John W. Schoen • Profile • E-mail

As a fresh crop of college graduates prepares to enter the world of personal finance, lenders are lining up to sell them all manner of consumer credit. As Cathy in Texas is finding, these lenders can be persistent. Which makes this a good time for parents to make sure their kids are getting sound financial advice to counter the barrage of marketing students face from lenders pitching consolidation loans and credit card companies looking to get a new generation hooked on debt.

I have a small student loan for my daughter and get half a dozen phone calls A DAY about wanting more.  Some of the people say that I was prequalified off my credit report that they buy from the big three credit agencies in bulk!  Other said they got my name off the “database.”… Make it stop!
-- Cathy D., Richardson, Texas

Once upon a time, back when the Student Loan Marketing Association was set up in 1972, the idea of lending money to students them was to help them better their lives by getting a college degree. By guaranteeing these loans, Sallie Mae increased the pool of money available for loans and helped keep rates as low as possible. Taxpayer money was used to help finance higher education, not to help make student lenders more profitable.

No more. Today, student lending has become a lucrative slice of the multitrillion-dollar consumer financial services industry — the same people who flood your mailbox, at home and online, with junk mail offering low-teaser-rates credit cards, no-money down mortgages and “free” credit reports from fee-based “credit monitoring” services.

The last vestiges of student lending as a public service ended last week, with the $25 billion buyout of Sallie Mae by a group of private investors. The sale came just a week after the company agreed to pay $2 million to settle a case with the New York state attorney general’s office and agree to end abusive lending practices that included payments to schools in exchange for preferred treatment, hiring college officials to work for lenders, and lenders identifying themselves as college employees, among other practices.

As for what to do about that barrage of annoying phone calls, if you’re not already on the Do Not Call list, try signing up and see if that slows them down.  Unfortunately, there’s a loophole in the law that set up this service, allowing telemarketers to call anyway if they have an existing relationship with a customer.

You should also call the lender holding the student loan and ask for a form barring them from selling your information to other credit providers. Many of these privacy provisions are “opt out” rather than “opt in” — meaning that if you don’t specifically ask that the lender not sell your information to the highest bidder looking for “leads,” they are free to do so.

Most important, you should talk to your daughter about predatory lending.

As the New York attorney general’s investigation has highlighted, some colleges and universities — trusted by parents to look out for the students they are educating — are complicit partners in the aggressive marketing of debt to your kids.

Financial aid offices, for example, are required to provide “exit interviews” with students carrying loans; the purpose is to teach students about debt and help them better understand how to manage their loans after they graduate. As the New York Times recently pointed out, some schools have turned over this task to the very loan companies that are looking to sell students more debt — often in the form of “consolidation loans” that claim to save money by wrapping up multiple debts into one monthly payment.

Depending on the student’s individual circumstances, a consolidation loan can be a good idea — especially if interest rates have fallen since the loan was originally taken out. But consolidation loans are also a lucrative vehicle for selling more debt. Unsophisticated borrowers jump at a lower monthly payment and fail to price the total cost of the new loan — either in higher rates or longer term.

In any case, if the purpose of financial counseling is to help students make wise choices, sending them to a sales presentation from a lender is like hiring the manager of a local fast-food outlet to teach nutrition.

Credit card companies, who also have learned that college students are a lucrative pool of new borrowers, often can be seen setting up tables in the student union or food court — again with blessing of the host university. If your son or daughter calls home to ask about one of these pitches, ask them if there was more than one card issuer signing up students. By obtaining exclusive marketing rights at a closed location like a college campus, card companies are able to avoid the market competition that allows prospective borrowers to compare terms and pick the best offer. If this is not made clear, call the dean's office and ask if the college was paid for this exclusive shot at selling your child a credit card or loan.

If your son or daughter signs up without asking you, explain the pitfalls of using the monthly minimum payment as a benchmark for a reasonable debt load. It’s a safe bet the credit card issuer didn’t explain credit cards this way. Some lenders issuing these “starter” credit cards offer a $50 credit when the account is opened — just to get the student in the habit of using the card.

Students looking to get off to a good start need sound advice on the responsible use of credit, Unfortunately, as long as the financial services industry sees this group as a profitable market to be exploited, it will have a hard time earning anyone’s trust as a reliable provider of guidance and advice for first-time borrowers.

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