Accidentally Into the Loan Wars
As controversy has swirled around the student loan programs in recent months, there has been much debate -- and often confusion -- about what colleges must do to ensure that students and their families are getting the fairest and best possible deal. A wide range of proposals -- from the Education Department, Congress, New York Attorney General Andrew Cuomo, and the country's leading financial aid group -- have all aimed to define the obligations of campus financial aid officials to offer sound, dispassionate advice to prospective borrowers, and to make sure that students have access to the lender of their choice, as federal law requires.
Amid that cacophony of competing and sometimes conflicting guidance, the University of North Carolina system offered its own regulations in late May, with the goals of providing "the best possible loan terms and choices for students" and giving financial aid administrators at its 16 campuses the clearest possible advice about about "what's legal and what's ethical," says Kimrie Rhinehardt, the system's vice president for federal relations.
In many ways -- barring campus aid officials from accepting travel reimbursement or gifts other than "nominal" advertising items from lenders, requiring colleges to disclose significantly more information to students about private loan terms, for instance -- the North Carolina rules closely mirror other proposed restrictions on financial aid officials. But the UNC proposal is distinctive in one major way -- and that difference has entangled the plan in the longstanding brawl between the federal government's competing direct and guaranteed loan programs.
Like several of the proposals being discussed in Washington, the North Carolina regulations require each institution in the 16-campus system to have at least three lenders on its "campus-based lender list" (the system eschews the commonly used tag of "preferred lender list," Rhinehardt says, because " 'preferred' just sounds like we're giving preference to someone, and that's not right").
But unlike a similar proposal put forward by the Education Department in proposed regulations last month, the UNC rules would impose the three-lender requirement not just on colleges that participate in the federal guaranteed loan program, but on those that provide loans through the direct loan program, in which the federal government is the only lender.
"Campuses must have no fewer than three lenders on a lender list," the UNC policy states. "Campuses and university associated entities shall not enter into any exclusive agreement with a student lender through the Federal Family Educational Loan Program, the William D. Ford Direct Lending Program, or for a private educational loan expressly for postsecondary educational expenses. Campuses with an existing exclusive agreement with the federal government shall work with the Department of Education to amend the agreement to permit participation in both the William D. Ford Direct Lending Program and Federal Family Education Loan Program."
In other words, the nearly half of North Carolina public universities that have participated exclusively in the direct loan program until now will, going forward, have to offer students loans through at least two lenders in the guaranteed loan program, too. (The campuses affected are Elizabeth City State; Fayetteville State; North Carolina A&T State, and North Carolina Central Universities; North Carolina School of the Arts; the Universities of North Carolina at Asheville and Wilmington; and Western Carolina University.) Rhinehardt says that the policy change is designed to ensure that students at all UNC campuses have multiple options for their loans. She recounted that the system's president, Erskine Bowles, had run into a parent whose child was a student at a college in direct lending. The parent wanted his or her child to take advantage of appealing loan terms offered by the state's nonprofit lender, "but the institution said, 'No, we won't process that loan,' " Rhinehardt says.
"For President Bowles," she says, "it just didn't make sense that the student would only have one choice, especially because the school chose that option, not because the student chose that option."
Advocates of the direct loan program, who have complained for years that Congressional Republicans and the Bush administration have unfairly tilted the playing field toward the lender-based guaranteed program, see the North Carolina plan as the latest in a line of efforts to further impair the direct loan program, which has seen its share of federal loan volume dwindle to about 20 percent. They find irony in the fact that a major university system is responding to a scandal set entirely in the lender-based program by taking steps that will almost certainly hurt its competitor.
"Requiring choice makes sense in the [guaranteed loan] program where there are documented problems of abuse," says Thomas Butts, a former U.S. deputy assistant education secretary for student assistance and a longtime supporter of the direct loan program. "But this comes across as a way to try to force the direct loan schools into FFEL. The effect of what they're doing is just that."
Butts and other veterans of the national conflict over the two loan programs are admittedly seeing the North Carolina through the prism of lender-led efforts to damage the direct loan program. They note that loan company officials -- who clearly favor the guaranteed loan program over direct lending -- had taken the same stance North Carolina is when they argued (unsuccessfully) during Education Department negotiations this winter that the three-lender requirement for preferred lender lists should apply to the direct loan program, too.
And given that federal rules allow guaranteed loan providers to cut their interest rates and fees in ways that direct loan colleges cannot, the North Carolina policy almost ensures that guaranteed loans will seem more appealing to borrowers looking at the sort of oversimplified table (showing basic rates and fees) that are likely to confront students and parents looking at a preferred lender list, says Eileen O'Leary, assistant vice president for finance and director of student aid and finance at Stonehill College, in Massachusetts. That's even though direct lending offers borrowers and their families many benefits -- such as income contingent repayment, the certainty that their loans won't be sold, etc. -- that will help them in the long term, O'Leary says.
"From the standpoint of 20,000 feet, I can see how [UNC officials] might think they have done a good thing," says O'Leary, past president of the National Direct Student Loan Coalition. "But this ignores campus decisions about what's best for their own students, and in the long run this may not be good for North Carolina students." She and others also note the close ties between the University of North Carolina and the North Carolina State Education Assistance Authority, which guarantees loans provided by the nonprofit College Foundation of North Carolina.
Rhinehardt rejects any assertion that Bowles or other North Carolina officials are aiming to harm direct lending; Bowles, after all, was chief of staff to President Clinton, who pushed the create the program in his first term. "President Bowles has no opinion on the quality of any of these products -- he personally has not researched them, and there was no discussion of what this might do to lenders down in Charlotte," home to several leading banks. "In no way does the University of North Carolina want to discourage any campus from participating in the direct loan program. This is not about FFEL vs. direct loans; it's about students and parents getting to choose what loan they want." (The UNC policy does not in any way require colleges that participate in the guaranteed loan program to offer direct loans, although "nothing in this code prevents an FFEL school from pursuing the opportunity to offer direct loans," Rhinehardt says.)
Officials at UNC institutions that participate in the direct loan program say they believe that the system's proposal is well-intentioned and does not mean to do harm to direct lending. But that doesn't mean they aren't fearful that it will.
"In no way do I think that this is intended to undermine the program, but I certainly think there could be some unintended consequences," says one UNC campus official, who asked not to be identified to avoid appearing to criticize system officials.
Two campus officials said they would almost undoubtedly need to hire more staff members to help them maneuver through the processes of an entirely new loan program, and one suggested that the system wait to put the new rules in place until it becomes clearer "which way the wind's blowing in Washington.... Some of the legislation going forward could end some of the borrower benefits that [President Bowles] thinks FFEL lenders are providing that we can't."