Copyright© 2007 by School Services of California, Inc.

                                      Volume 20                   For Publication Date: April 27, 2007             No. 10

Controversy Surrounding Student Loan Preferred Lender Lists 

Several concerns about the federal student loan process have been reported recently in the media, including reports that federal student loan data has been used by lenders for marketing purposes, and that colleges and financial aid officials have had a financial interest—such as receiving gifts, trips, and revenue sharing—in recommending certain lenders to students. The New York State Attorney General, Andrew M. Cuomo, has been at the forefront of investigating relationships between lenders and colleges and has made some proposals to address these relationships, including specifying how financial aid offices give advice to students. He is testifying before the U.S. House of Representatives on the matter this week. 

The controversy stems from the use of what is called “preferred lender lists.” Financial aid offices use these preferred lender lists to help students and their parents find a good deal for their situation. There are literally thousands of lenders who provide both low-cost student loans and higher-cost private loans, so financial aid offices are relied upon to provide assistance with considering the many options available. The premise is that there should not be any conflict of interest on the part of the financial aid officer or the college in making student loan recommendations to students and parents.   

Two different bills are being proposed in the House—one by Democrat Representative George Miller and one by Republican, Representative Howard P. (Buck) McKeon, both from California. There is a belief that there can be common ground found between the two proposals, but the Democrat version calls for a tougher stance—a moratorium on the use of all preferred lender lists.  However, both parties agree that a temporary moratorium makes sense until the preferred lender lists can be investigated and determined to be free from conflicts of interest. A permanent moratorium could make it more difficult for students to find good loans among the myriad lenders and programs available.   

Mr. Miller has called upon the U.S. Department of Education (USDE) to increase oversight of the student loan program, including defining for colleges what a conflict of interest would be, requiring colleges to disclose of any conflicts of interest, and investigating all of its own department employees who oversee federal student loans. 

A spokesperson for USDE has said that the Department has already been working on addressing many of these issues through a series of rule-making negotiations with government representatives, colleges, lenders, and other stakeholders, and will soon be providing recommendations back to the Department. 

As a result of Mr. Cuomo’s investigations, we are already seeing results—several of the major lending institutions have agreed to stop providing incentives to colleges and to develop policies to prevent conflicts of interest in the future.

—Sheila G. Vickers