From the Mailbox: The Power of Financial Aid Administrators

At Higher Ed Watch, we value the comments we receive from readers — even the really angry ones from student loan industry officials that accuse us of being “socialists” for wanting to end a government program. We understand that people on both sides of the student loan reform debate are passionate in their views, and we enjoy fostering vigorous debate on this subject.

Occasionally, however, we receive comments that are so misinformed they demand a response. Take, for example, one we received yesterday in response to a post we wrote about how Sallie Mae uses the relationships it has forged with colleges through the Federal Family Education Loan (FFEL) program to cross-sell its more expensive private loans to students. “I am not a supporter of Sallie Mae by any means, but you have provided incorrect information,” the commenter wrote. “Financial Aid offices CANNOT recommend any lender over another when providing information for Stafford or private loans as it is against federal regulations.”

We found this comment bewildering because there is absolutely no prohibition in federal law or regulations against colleges recommending lenders to students. Most schools participating in FFEL do, in fact, recommend favored lenders to students by providing them with a list of “preferred lenders.”

It is certainly true that in the wake of the “pay for play” scandals that engulfed the student loan industry in 2007, federal lawmakers took steps to ensure that students are given at least a modicum of choice when selecting loan providers. For instance, colleges are now required by federal law to include at least three unaffiliated lenders on their FFEL preferred lender lists, and two unaffiliated loan providers on their preferred lender lists for private loans. Some colleges have voluntarily chosen to stop recommending lenders to their students in the face of the new requirements. But, again, most FFEL schools continue to do so and there is absolutely no federal prohibition against it.

Ordinarily, we might have overlooked this comment. But it caught our attention because this isn’t the first time we’ve heard it. In fact, last week we received some similar responses to a post we ran outlining our objections to the “Student Loan Community Proposal” that Sallie Mae has championed. One respondent wrote:

Colleges under the FFELP program haven’t selected the student’s lenders in at least the 10 years I have worked in financial aid. By repeated requests from students colleges created a convenient list that the students didn’t have to use but made it easier to not get overwhelmed by the choices.  The list tended to have 8 to 20 lenders at most schools… I concede that students overwhelmingly selected lenders from the list and banks felt enormous pressure to be on the list and tried to curry favor with schools to get on their list.  However, this is very different from colleges selecting the lender that each individual student used. 

This response is much more reasonable than the previous comment, as it is true that some colleges offering preferred lender lists give students a wider range of options than others. The commenter also acknowledges that lenders “curry favor with schools” to get on these lists, and that the vast majority of students stick to their aid administrators’ recommendations.

However, this comment vastly overestimates the amount of choice borrowers in FFEL have actually had. Don’t forget that in 2007, the U.S. Department of Education found that one lender made at least 80 percent of students’ federal loans at 921 participating colleges. That same year, the research firm Student Marketmeasure reported that 1,412 FFEL schools had one loan provider that made 80 percent of their students’ federal loans, with 531 of those colleges recommending only a single lender to their students.

These numbers speak volumes about the power financial aid administrators wield over students on their campuses — and the success lenders like Sallie Mae have had harnessing this power to their advantage. No wonder the student loan giant wants to keep things just as they are.