Q&A: The Student Loan Controversy

A graduation cap, diploma, and money.
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Many students rely on loans to help pay for college. And when it comes to choosing a lender, students are likely to turn to those given "preferred" status by their college or university. But now, federal and state regulators say a few lenders earned their preferred status thanks to kickbacks they offered to the schools.

As lawmakers continue to probe whether colleges are giving their students unbiased financial advice, Kelly Field of the Chronicle of Higher Education helps explain the controversy.

What is the problem with student loans?

What it comes down to is whether schools are putting private lenders on their preferred lender list on the basis of the benefits to the students, or on the basis of perks that the schools, or their financial aid officers, got. Consulting fees or stock options from the lender, for example, are the kind of allegations that are out there. That's what it boils down to: conflict of interest and whether the students are being offered unbiased advice.

What led to all this attention on student loans?

The attorney general of New York, Andrew Cuomo, has been investigating what he calls the "unholy alliance" between student loan companies and colleges. Basically, he's been looking at kickbacks that loan companies have been offering to colleges or financial aid directors. And he has reached settlement agreements with several institutions, as well as with some of the major student loan companies, including Citibank and Sallie Mae. (Citibank admitted giving kickbacks to schools, and has agreed to stop. Sallie Mae did not admit to giving money to schools, but agreed to a code of conduct barring the practice.) Cuomo has recently encouraged the attorneys general of other states to get on board and take a coordinated approach to this issue. Several other attorneys general have signed on.

Is this a new problem?

Cuomo wasn't the first one to recognize this. The Education Department has been receiving a growing number of complaints from some new student loan companies that were having trouble breaking into the market. They complained that college financial aid officers were blocking student access to their loans by either delaying or denying certification. (Certification requires a school to verify that a student is enrolled and eligible for the loan.)

The new companies said they couldn't get their loans certified by schools because they weren't on the schools' preferred lender list, and that made it really difficult for students to get their loans. The Education Department recently created a task force to handle these complaints, but the department has been accused of not taking enough action. The Education Department is working on setting new rules, and Congress is working on legislation that would address many of the same concerns.

Is this hurting students?

It's a bad thing for students if they are being denied access to loans with better terms. There hasn't been any analysis conducted of whether students would have gotten better deals if they had been allowed to take out loans with other companies. Of course, the schools are saying that they haven't actually denied access to loans from non-preferred lenders, but that's a matter of debate. It's hard to really quantify whether any students have been denied the best deal.

The Education Department basically puts it in the context of borrower choice. It wants to make sure that students can get any loan they want. But there is nothing in the law that requires colleges to only include the lenders on their list that have the best terms and conditions. In fact, there are no laws out there right now regarding preferred lender lists.

What should students do?

Students should definitely ask questions. They should ask their financial aid directors how they put together their preferred lender list, what sorts of questions they asked those lenders when they were putting it together, and how they determined who would be on there. Students could also ask the aid directors if they have any relationships with lenders.

Students should not assume that just because their college hasn't been caught up in the investigation, they don't need to ask questions. It's a prudent thing to do — even though the majority of schools probably weren't engaged in these sorts of practices — just to be on the safe side.

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