When students or parents approach a college financial-aid office for a federal loan, they may not be getting the best possible deal.
Borrowers are often given a "preferred list'' of lenders certified by the college. You may believe that these are the best loans available since they are chosen by the aid office.
Getting a loan outside of the preferred list may even be discouraged by the college, which is heavily marketed by lenders.
"My client approached a school for a loan and was told by the school that his loan would be processed faster if he went with a lender on the preferred list,'' said John Pearson, a certified public accountant and certified college-planning specialist in Norwalk, Conn. "The preferred system can often deter students from getting the best deal on a loan.''
"Colleges won't tell you that you can get a loan down the street and save money,'' adds Brian Greenberg, a CPA and certified college-planning specialist in Marlton, N.J. "Anything is negotiable. You can get your money anywhere.''
How does a lender get on a school's preferred list? Is there some quid pro quo? The college-controlled lending process has been challenged recently by MyRichUncle.com, which is owned by MRU Holdings Inc., a small specialty finance company with $24 million in student loans through March 31.
Raza Khan, president of the company, alleges through national advertising that lenders offer colleges revenue-sharing deals, or a percentage of the profit of a loan; "opportunity pools'' of loan money for high-risk borrowers; and gifts and trips to aid officials.
"We'd like to see the preferred lender list go away,'' Khan said. "The students are not always getting the best deal. The only way they can do better is to shop around and compare.''
"The preferred lender lists are at the root of all of the allegations regarding these improprieties,'' said Henry Howard, a former college-aid officer and chief executive officer of U.S. Education Finance Group, a student-loan company based in Miami. "The preferred lists are no longer necessary and should be eliminated.''
Doubtless, smaller lenders are peeved that they don't have unfettered access to borrowers through aid offices. There are plenty of finance companies and banks that want to do business directly with colleges.
For lenders, the Federal Family Education Loan Program is not only highly profitable, it's virtually risk-free because of government guarantees. At present, federal and private loans constitute an $86 billion business, accounting for 39 percent of the $222 billion spent on higher education. As college becomes costlier, more students turn to borrowing.
Competition for loans
Yet does the preferred system quash competition because only the largest companies with marketing clout are represented?
Dallas Martin, a former aid official at three colleges and president of the Washington-based National Association of Student Financial Aid Administrators, which represents college aid officials, said while he estimates that 60 percent of universities have preferred programs, "the vast majority of institutions are trying to look out for what's best for students. They don't want to send them off to a place that's not best for them. It could come back to haunt the institution.''
Doing pay-for-play deals, or offering "inducements'' for student-loan business, is forbidden under the federal Higher Education Act.
The U.S. Education Department's Office of Inspector General, the agency's watchdog, has investigated potential abuses involving lender incentives to colleges. The office only probed two schools in 2003, issuing an "alert memorandum'' to Sally Stroup, assistant secretary of education.
"Our review concluded there are bargaining practices between schools and lenders for federal preferred loan status,'' the Aug. 1, 2003, memo to Stroup stated.
More recently, Catherine Grant, a spokeswoman for the inspector general's office, stated in an e-mail that it found "no specific evidence of improper lender inducements and does not have any audits or inspections under way following up on this issue at this time.''
Nevertheless, the inspector recommended that the Education Department "re-evaluate the anti-inducement provision of the Higher Education Act.''
Martin, who said he is aware of opportunity pools and acknowledges that finance companies may entertain aid officials and appoint them to advisory boards, notes colleges are "bombarded with lenders.''
Ways to save
"We've heard of abuses and referred them to the Department of Education, and the department has gone after them. A lot of it is hearsay. But providing gifts to colleges is clearly outside the law. In the final analysis, if a school refuses to certify a loan, it should be reported to the department.''
While most aid administrators are probably acting ethically, don't assume that your college will give you the best deal.
Say you borrowed $20,000 through a 10-year federal loan at 6.8 percent annually. You'd pay $230 a month for total payments of $27,619, which includes $7,619 in interest.
Drop the rate on your loan 1 percentage point and you save $10 a month but $1,214 in total interest. Discounts are available if you compare lenders. The Internet is a good place to start.
With the recent increase in federal-loan rates, it's essential to ask questions:
-- Does your college receive any inducements from lenders? If so, these incentives should be disclosed.
-- Do the loans you're applying for have any pre-payment penalties? What would trigger the loan adjusting to a higher rate? Avoid loans with added expenses such as repayment or insurance fees.
-- What kinds of discounts apply to your loans? Can you get a rebate of origination fees or discounts for using auto-debits or paying on time? Keep in mind that the best loan terms are offered to borrowers with the best credit rating.
Although most colleges trumpet academic freedom, that sentiment may not apply to students trying to find the best loan deal on campus. Keep in mind that no matter what the college recommends, you're free to obtain better terms elsewhere.
Wasik is author of "The Merchant of Power'' and a Bloomberg News columnist.