Student loans still pose plenty of pitfalls

John W. Schoen Senior producer • Profile • E-mail

With college students soon returning to school and tuition bills due, this is crunch time for parents and students struggling to figure out how to pay for it all. And these days, widespread reports of abusive practices by student lenders and schools — putting their financial interests ahead of student borrowers — have left many families wondering how to get reliable information about one of the mainstays of college financing.

Student lending has always been a complex thicket of multiple, overlapping government and private programs — each with a variety of terms and conditions that make the average credit card application look like a middle-school spelling quiz.

“This is a very complex marketplace," said Morgan Olsen, treasurer at Purdue University. “Even people who are directly involved in the industry have a challenging time keeping up with new developments.”

To help parents wade through the sea of direct government programs and private loan subsidies with their various terms, conditions and discounts, college financial aid offices years ago began developing lists of “preferred lenders.” Usually, each list consists of a half-dozen or so lenders that have agreed to favorable terms in return for a portion of the school’s loan volume.

As direct student aid and federal grants failed to keep up with the rising cost of tuition, that loan volume became an increasingly lucrative stream of cash. Today, the student loan market is an $85 billion business.

“We wouldn’t be talking about [student-loan reforms] if it weren’t for the fact that debt is such a big piece of educational financing these days,” said John Walda, former president of the Indiana University board of trustees.

That big pot of money turned out to be a tempting target not only for lenders but for the schools themselves, which soon began demanding a piece of the business. At the heart of the ongoing investigation by New York Attorney General Andrew Cuomo was the revelation in April that schools were steering students to preferred lenders in return for a variety of inducements.

In some cases, lenders offered trips to resorts for financial aid officers; in a few cases, the lenders offered stock or other gifts to college officials. Some financial aid offices demanded a portion of lenders' profits in return for inclusion on the preferred list — regardless of whether the lender was producing the best terms for students.

"After pushing students into the arms of private lenders, the federal government has failed to ensure those lenders operate ethically and legally, and has allowed students to become victimized," Cuomo told a Senate hearing in June.

(Cuomo, through a spokesman, declined a request to be interviewed for this story.)

So far, Cuomo’s office has negotiated settlements with a half-dozen lenders and at least a dozen schools — recovering nearly $19 million and returning it to student borrowers who signed up with lenders who paid for a place on the list.

In addition to offering lists of preferred lenders, many school financial aid offices provide advice to students and parents trying to sort out the mind-boggling choices and loan options. Cuomo’s office found that some lenders were providing their own staffers to fill this role — without disclosing who they were working for. Advice that was supposed to be unbiased and impartial turned out, at some schools, to be an extension of marketing programs operated by lenders.

It didn’t always work this way. For decades, student loans were handled by private lenders subsidized by the government to keep interest rates low. Preferred lender lists were intended to highlight the lower rates offered by subsidized lenders who participated in the program.

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