Still Steering Students

At a time when cozy relations between banks and college financial aid administrators have come under intense scrutiny, we are sorry to report that some colleges that participate in the Federal Family Education Loan (FFEL) program continue to make it extremely difficult for their students to take out federal student loans with the lenders of their choice.

Under the Higher Education Act, students who attend FFEL schools are allowed to choose their own loan providers. The vast majority of students select lenders recommended by their colleges financial aid offices. But some students prefer to shop around and look for better deals themselves or take out loans with companies they believe to have greater integrity than those on their schools preferred lender lists. Colleges are required by law to honor such requests.

For years, higher education institutions ignored these rules and federal regulators looked the other way. But then in the summer of 2006, the relatively new loan company MyRichUncle made a splash with a controversial advertising campaign accusing financial aid administrators of taking “kickbacks” and “payola” from lenders in exchange for getting exclusive placements on the schools preferred lender lists and barring students from taking out loans from other companies. They were right.

Over the past year, investigations by New York Attorney General Andrew Cuomo, federal lawmakers, and others, including Higher Ed Watch, have borne out the allegations. In response, both Congress and the Education Department have proposed legislation and new regulations respectively that aim to eliminate conflicts of interest between colleges and lenders and make schools put students interests first. And dozens of college have signed Cuomos Code of Conduct, which requires FFEL colleges to inform students “that they have the right and the ability to select the lender of their choice regardless of the preferred lender list.”

But has this all translated into changes on the ground? Have colleges in FFEL gotten the message and changed the way they do business?

Perhaps some have. But, according to officials at MyRichUncle and some other less public FFEL lenders who have run into difficulties, the news is not encouraging. Many colleges, they say, continue to limit students choices.

According to these officials, the colleges in question do not outright refuse student requests to borrow federal loans with companies other than those they have recommended. Instead, some college aid officials are now actively discouraging students from pursuing non-college selected lenders, warning students for instance of long processing delays that could prevent them from getting money in time to pay tuition or cover rent. Colleges that issue such warnings may be dangerously close to violating Education Department rules that expressly forbid colleges from unreasonably delaying the certification of a students loans.

Education Department officials have made clear that their regulations prohibit colleges from using financial aid processes that automatically refer students to specific lenders. But some colleges appear to have ignored those warnings. At Catholic University, for example, students are required to apply for federal loans directly through Sallie Maes loan origination system. This makes it virtually impossible for students to take out loans from other lenders.

Such was the case with a Catholic University student this summer who was discouraged from taking out a federal loan with MyRichUncle. “If you are using MyRichUncle for your Stafford Loan, unfortunately I cant verify that they are a reputable lending institution,” a university financial aid officer said in an e-mail that the loan company shared with Higher Ed Watch. “We recommend that you use our preferred lender for your federal loans.”

Similarly, Seton Hall University steers prospective borrowers to Sallie Mae, which provides them with a pre-filled out master promissory note that they just have to sign and return to the loan company. In other words, the universitys students are never told that they have other options.

Some universities give students multiple options of lenders, but still manage to artificially limit students choices.

At the State University of New York at Cortland (SUNY-Cortland), for example, students are told on the financial aid website that they are “free to choose among the dozens of lenders who provide student loans.” But when first-time students apply for loans, they are directed to a website that requires them to select a loan provider from a drop down box that includes a very short list of “preferred lenders” and a longer list of “acceptable lenders.” Students are then told that if they dont choose one of these lenders, the student aid office will make the choice for them.

So how does SUNY-Cortlands financial aid director, Dave Canaski, decide which lenders are acceptable? A recent U.S. Senate report on improper student loan practices accused him of choosing favored lenders “based only on benefits to the school, not the student.” The document includes an excerpt from a lenders sales report related to Canaski:

“He has also developed a rules of engagement doctrine for lenders. If they violate one of the tenets on Daves doctrine then they are abolished from the list and must sit in the corner until they earn the schools good graces.”

This summer MyRichUncle — a lender that is certainly not in Canaski’s “good graces” — had to get its legal counsel and the university’s president involved before the school agreed to certify a student’s federal loan application with the company.

At a time when the Education Department and Congress are considering imposing new regulations on college aid offices, we find it disturbing that some colleges still appear to be violating rules already in place. And the fact they are doing it at a time when they are under so much scrutiny is even more disturbing. What they will do when regulators and policymakers turn their attention elsewhere?

Maybe policymakers should consider another solution that’s more aggressive. Because it seems shame isn’t enough.