State of the Financial Aid Industry
There's been a tremendous amount of news about the student loan and financial aid industry lately. Those who follow the industry know that New York State Attorney General Andrew Cuomo has been pressing settlements or lawsuits to both lenders and colleges, alleging unethical and illegal practices. The headlines have been filled with sensational claims of all kinds - some factual and some probably exaggerated to some extent. Let's take a balanced look at some of the practices being called into question.
- Revenue sharing. When a college sets up a revenue sharing agreement with a student loan company, the loan company may offer the college a payment based on the loans taken out by that college's students, usually a percentage of the loan. While some argue that revenue sharing gives colleges more money to work with for defraying administrative costs or funding additional scholarships, it has been deemed a conflict of interest when colleges have a financial incentive to push students to a preferred lender when it may not offer the best benefits or lowest rates.
- Opportunity pools. Not every student who applies for a student loan will receive it, especially with private student loans, which are credit-based. When a college sets up an opportunity pool agreement with a student loan company, the loan company agrees to approve some students who would otherwise not be approved for a loan. This allows more students the chance to afford college who might not otherwise be able to, but can also provide loans to students whose families may not have the financial resources to repay the loans.
- Call center contracting. Running a financial aid office can be an overwhelming task, particularly at large colleges and universities with tens of thousands of students. When a college sets up a call center agreement with a student loan company, the loan company dedicates a portion of its customer service center to act as customer service for the college. The student loan company's employees may identify themselves as employees of the college or employees of the loan company, depending on the contract terms. There are benefits to the college in that call center contracting reduces the burden and cost of a financial aid office for a college. However, call center employees may recommend their employer (the lender) over other lenders, even if other lenders have products with better benefits or lower rates.
- Advisory councils. To stay in touch with what's happening in the financial aid world, student loan companies often convene advisory councils and invite college financial aid officers to participate. In some cases, the student loan companies pay travel expenses for financial aid officers to attend advisory council meetings. In other cases, financial aid officers may be paid for their time. While advisory councils can help student loan companies stay in touch with what colleges and their students need, some may perceive the lender has an ulterior motive. By serving on an advisory council and accepting payments or reimbursements for expenses, financial aid officers may have an incentive to recommend a specific lender over others that may have better benefits or lower rates.
- Payments and gifts. In a few of the recently publicized cases, financial aid officers have accepted gifts of significant value from student loan lenders, ranging from consulting fees to company stock. There are no positives to this practice as offering gifts of significant value implies a quid pro quo, meaning that reciprocity is usually expected, such as placement on a lender list.
- Preferred lender lists. Typically, a college assembles a list of preferred lenders which it recommends to students. In most cases, financial aid officers solicit proposals from lenders for product benefits and rates. A list of lenders is then drawn up and given to students, typically along with their financial aid award package. For the most part, financial aid administrators place lenders who offer the best benefits and rates to students on the list, helping simplify the task of choosing lenders for students and families. However, the process by which lenders are chosen is not always disclosed by colleges. If there is a conflict of interest as described above, lenders who don't offer the best benefits or lowest rates may still be placed on the list.
Some of the practices outlined above are clearly a conflict of interest and need to come to an end, such as offering gifts of significant value in exchange for promotion or list placement. Others, such as opportunity pools and revenue sharing, are more of a gray area because there's a definite benefit to some students and families, but potentially at the cost of value to other students and families.
Despite the recent uproar in the press, it is important to keep in mind that financial aid officers are for the most part honest and ethical people trying to stretch every dollar they have to help you pay for the ever increasing cost of college. There are a few who have made very bad judgment calls and have behaved unprofessionally, but the majority of financial aid professionals do have your best interests in mind and can be trusted.
Incidentally, it's worth pointing out that the Student Loan Network has never and will not engage in these practices. We play by the rules very strictly, and hope that when you choose a student loan company you'll choose us as the best balance of competitive products and great customer service. If you have any questions about our loan services, or would like help and advice with the financial aid process, please give us a call toll-free at (877) 328-1565.
Christopher S. Penn is the producer and creator of the Financial Aid Podcast, a daily free Internet radio show about making college affordable, as well as Chief Technology Officer of the Student Loan Network.
This organization offers federal student loans and student loan consolidation for college students, both undergraduate and graduate. His work has been featured in several books, newspapers, and conferences.
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