When borrowing money for college, who should you trust to recommend a good lender - your university, or the United States government?
U.S. Senator Ted Kennedy (D-Mass.) and New York Attorney General Andrew Cuomo are delving into this question with a recent probe into the relationship between colleges and private lenders.
Universities typically recommend private companies for various types of student loans (including federal Stafford loans) to help students finance their education. But colleges that stick to a list of only a few lenders have earned the ire of leaders like Cuomo and Kennedy.
While such lists are common practice, Cuomo in particular has voiced concerns about conflicts of interest, and demanded information on these lists from eight loan companies and two dozen colleges nationwide, including eight in Massachusetts, the New York Times reported last Saturday.
"My office is seeking to ensure that students are being steered toward lenders offering the most competitive rates, not those who offer the best perks to financial aid administrators," Cuomo said in a statement.
Kennedy's bill, the Student Loan Sunshine Act, would require colleges to disclose interest rates on the student loans they recommend, report gifts and financial benefits received from lenders, and would finance a government study of aggressive loan marketing, according to his press office.
"At a time when families are pinching pennies more than ever to afford college, we need to ensure that students are getting the best rate on their student loans," Kennedy said in a statement. "We need to examine these practices closely and put a stop to any action that prevents students from getting the best loan deal possible."
But some higher education professionals say the probe is at best useless and at worse meddlesome.
Director of Financial Aid Patricia Reilly told the Daily on Feb. 5 that, as of then, Tufts had not received a request in connection with the proposed bill for information about Tufts' lending practices.
She also said that she does not see the need for the proposed reforms. "I'm slightly insulted they think we make these recommendations because [lenders] sent a basket of cookies," she told the Daily.
Reilly said that Tufts requests information about companies' loans, then, based on that information, selects the top five lenders for each of its three private loan programs.
"Families are always free to borrow from whatever lender they choose, but we feel we offer a valuable service by giving them guidance about their college financing options," she said in an e-mail to the Daily. "This type of preferred lender list is standard practice in most financial aid offices. I would hate for there to be regulations enacted that prevented us from offering this service to our families."
She said that these lists can help prevent parents from using abusive lenders. "There are an awful lot of lenders out there that are not giving good deals to our parents," she said.
Still, not everybody is convinced about the benefits of the lists.
Harris Siegel (A '59), the director of college counseling at Stuart Country Day School, an independent school in Princeton, New Jersey, is skeptical about lending lists.
"Colleges have a vested interest in promoting that particular lender, and though I have no definitive way in saying that the rates are different, it's kind of a shady thing," he said. "I'd much rather see an open competition of lenders in the area."
Recommending multiple lenders, as Tufts does, makes sense, he said. "But to do just one, that's a problem."
Though uncertain if government intervention should have a role in the business of private institutions, Siegel is also concerned about companies' sharing information about potential clients even if a school recommends multiple loan competitors.
"Let's say Mary Jane applies to Tufts, gets a [financial aid] package, and Tufts says, you can go to all three lenders. Do they share information about that individual? Is there competition for rates between the three lenders?" she said.
Heather O'Donnell, director of financial aid at Sarah Lawrence College, thinks that despite sentiments of mistrust, in most cases financial aid offices do have students' best interests at heart.
"I'm in this field for 28 years and with an exception of a handful (and I do mean less than 5 people), I have yet to meet anyone in financial aid who isn't first and foremost about their students," she said in an e-mail to the Daily. "I welcome the Cuomo investigation (perhaps not the tactic involved) because I truly believe there will be no ethical findings against the practice of preferred lender lists."
According to O'Donnell, the government may not come in as entirely neutral party, either. "The government already has their hand ... in this issue because they offer a parallel program called the William Ford Direct Loan program," she wrote.
Colleges could choose to opt out of referring students and parents to private lenders and use only comparable government loans, O'Donnell explained. About 30 percent of colleges decided to do so, while 70 percent declined and let competition between private lenders continue.
Sarah Lawrence and Tufts both opted out of the government program. "The reasoning was simple. The U.S. government does not have the capital ready at any time whereas a lender has many capital reserves upon which to draw. We were also very uncomfortable with the 'Big Brother/Sister owns the entire process,'" O'Donnell wrote.
But is more government intervention the answer? "I don't know how the government can regulate these programs any further," she wrote. "Goodness knows they'll try, though."
