If you get student loans from a private financial institution, you might want to hold on to your pocketbook. Rates have gone up almost a full percentage point in the last few months and companies are tightening their standards to weed out credit risks.
Most students have yet to be greatly impacted in terms of higher rates or fewer choices of loan packages, but there are worries that the problems could worsen in the fall.
Fifty-seven banks are completely leaving the student loan business due to the global credit crunch and low profit margins. Sallie Mae, the largest student loan lender in the nation, will no longer offer federally guaranteed student loans, according to the San Francisco Chronicle. The House recently passed a bill allowing the U.S. Department of Education to buy up student loans, which would provide more money for lenders to make new loans.
But as steps are taken by the state and college administration to ensure students are relatively insulated from this unfortunate result of the sinking economy, it is important to avoid conflicts of interest that may prevent the best solutions possible from being implemented.
When college administrators do favors for banks in exchange for “gifts,” or banks do favors for colleges, it is under the implicit understanding that the college will recommend a particular student loan lender or group of lenders over others. This has the effect of distorting the market if students would have been able to get lower interest rate loans elsewhere.
This isn’t merely a theoretical concern; corruption is pervasive in the student loan business. A 2007 Senate report found e-mails from the financial aid officers at the University of Texas and Johns Hopkins (among others) requesting gifts and favors from the lenders, including “wine and tequila.” These officials were fired or resigned.
This issue also hits close to home. In 2005, UW-Milwaukee’s director of financial aid was sitting on the board of Student Loan Xpress when she designated the company as UWM’s sole preferred lender. The company paid for her to take all-expenses-paid trips to Ohio and New York City for conferences. The Milwaukee Journal Sentinel reported that the company managed 55.5 percent of student loans taken out by students in 2006, even though it’s exceedingly rare for a school’s dominate private lender to manage more than 30 percent of these loans.
The official in question, Jane Hojan-Clark, claimed there was no impropriety and that Student Loan Xpress was selected solely based on its merits. But the perception of a conflict of interest that could damage the finances of thousands of students is nothing to scoff at. Fortunately, UW-Madison’s director of financial aid, Susan Fischer, has refused offers to sit on any private lender boards to avoid the perception of quid-pro-quo.
Yet evidence has surfaced that even UW-Madison has contracted with some crooked lenders. According to a lawsuit by New York Attorney General Andrew Cuomo, the lender Student Financial Services had been paying the athletics departments of 63 schools — including three in Wisconsin — in order to use their “names, colors, mascots and logos” to market SFS’s loans. This was intended to give those loans the semblance of school approval, even though this was not necessarily the case.
Fortunately, UW-Madison has ended its relationship with SFS. But the fact remains that students’ choices are often swayed by advertising and school recommendations rather than an unbiased appraisal of each of the loan packages. This is understandable, as scrutinizing the terms of all the loans from all 14 private lenders listed on the UW-Madison financial services website can be a daunting task.
One way to deal with this is to cut private lenders out of the student loan market entirely. The federal government can increase the amount students can borrow from federally subsidized, fixed-rate student loans to cover all or almost all of their education. There would no longer be a reason to apply for private loans requiring higher interest rates.
The federal government also needs to pass tough legislation to restrict lender gifts to colleges and universities and regulate how colleges refer students to private lenders. This would help ensure that financial aid offices are helping students get the best private loan for their situation, rather than for the benefit of specific school offices or officials.
Until this happens, students who are shopping around for loans need to be aware of the direct marketing practices of the student loan companies. It’s important to exhaust all federal loan options before turning to private loans. Don’t be fooled by introductory “teaser” rates that go up after some time period. Be wary of high fees and late payments that may be in the loan’s fine print. And if they’re using school logos or mascots or offering to enter you into a prize drawing in their advertising, they’re probably trying to distract you from a lousy deal.
Ryan Greenfield ([email protected]) is a junior majoring in political science and economics.
Correction: Due to an editing error, the article should have said Sallie Mae has stopped offering consolidation student loans, not federally guaranteed student loans. We regret the error.