'Consumer Reports' for Student Loans
"Preferred lender lists" have almost become synonymous with "scandal" in some people's minds, at least since New York Attorney General Andrew Cuomo began his investigation earlier this year into whether colleges and universities let undisclosed relationships with the student loan industry affect how they chose the lenders to which they steered students.
Even in the wake of the investigation -- which resulted in a number of voluntary agreements with individual colleges and lenders, tougher legislation governing loan providers, and increased pressure on the U.S. Department of Education to regulate the industry -- there is no clear consensus on the fate of the lists, which colleges see as a way to inform parents and students about lenders that have worked well for them. Legislation in Congress, rules promulgated by the Education Department, and various state laws and codes of conduct would all require colleges to alter the lists in differing ways, but one way or another, change is inevitable.
Despite some calls for abolishing the lists altogether as remnants of an outmoded way of shopping for loans, most observers agree that preferred lender lists are here to stay -- in some form or another. But that doesn't mean all borrowers and parents have the same confidence in the lists that they may have had before Cuomo's revelations, amid suspicions that some financial aid offices still aren't always "honest brokers" of information.
To fill that apparent void of trust, private lenders have stepped up direct marketing through mail and e-mail to essentially bypass the college financial aid office; radio and television ads offering students "$40,000 a year in loans" have become increasingly common, and many families report being bombarded with loan information at home.
"I have seen a lot of different banks come through this year," said Pat Watkins, the director of financial aid at Eckerd College, who added that lenders are now "more aggressive in going after new markets than they have in the past."
The tactic of going directly to consumers has gained enough of a foothold to attract renewed scrutiny from Cuomo's office. For Raza Khan, the president and co-founder of MRU Holdings, which operates the MyRichUncle online student loan originator, what was exposed in some financial aid offices amounted to "marketing on behalf of lenders." As a result, MyRichUncle has been one of the big winners of the student loan investigations (which it also helped to unleash, with entreaties to Cuomo's office and to members of Congress): It advertises its services as "conflict free" and sees that perception as a significant part of its success so far. For the fiscal year ending June 30, 2007, the company originated $154.4 million in student loans, compared to $38.9 million the previous year.
If the questions about preferred lender lists have helped generate a sort of "Wild West" in the direct-to-consumer loan market, a new crop of services is aiming (and claiming) to tame it.
Cuomo's recent announcement of his office's investigation into direct marketing companies mentioned a prominent Web site that portrays itself as a third-party aggregator. In reality, according to the investigation, its student loan features have served as a cover for a single lender rather than a service comparing many competing offers. "LendingTree.com, a bidding tool for consumers to obtain a mortgage, prominently uses the slogan 'When banks compete, you win' to promote itself," the news release said. "Yet, until recently, students visiting Lending Tree’s website expecting banks to compete for their student loan business were instead funneled to a single lender." (The company hasn't commented to the press about the investigation, citing an ongoing regulatory matter.)
Other sites genuinely allow visitors to compare offers from different lenders. For now, they remain something of an experiment in the new frontier of loan evaluations -- online tools attempting to find revenue models in selling rate comparisons. But how reliable are they? And, in seeking to attract customers wary of colleges' and lenders' perceived ties, do they raise their own conflicts of interest?
"We have yet to see the emergence of anything credible like a Consumer Reports-type entity with true independence, financial and otherwise, from any of the participants in the system, [to] dispense advice on behalf of borrowers," said Barmak Nassirian, associate executive director at the American Association of Collegiate Registrars and Admissions Officers. "Schools were supposed to do that and they tainted themselves, or at least some of them tainted all of them."
Still, some services are trying to position themselves to play the role of neutral arbiter. One of these Web sites, Simple Tuition, is supported by online advertising from lenders, which has led some observers to question the advice it offers to visitors.
Part of the problem, suggested Robert Shireman of the Project on Student Debt, "is that private loan comparison sites have to find a revenue stream, which means they have to provide some kind of benefit to the lenders who are willing to pay them. [Simple Tuition has] gotten better at trying to list lenders that don’t have agreements with them about paying them. Still, if you do a search on Simple Tuition, it is those partners, the ones who will pay a referral fee to Simple Tuition, that pop up on the search engine first."
It boils down to necessity, and it's a dilemma that even search engines such as Google have struggled with -- whether, and how, to favor "sponsored links" and advertisers on pages purporting to offer unbiased results.
"It’s completely understandable that the comparison sites would do things that way, and the reason that some lenders don’t sign up for these sites ... is they feel like they’re giving away some percent of their profit margin to be on the site, and if they can find other ways of getting students to come their way, they don’t have to give away that percent or two, whatever arrangement that that comparison site has come up with," Shireman said.
Kevin Walker, the co-founder and CEO of Simple Tuition, bristles when critics point to the advertising revenue model of his and other profit-driven comparison sites.
“People aren’t stupid. They understand from other things that they do on the Web that comparison shopping engines, whether it's for travel or shopping for TVs or whatever, there may be a commercial element to it," he said. "It’s clear to me that we’re giving the borrower much more information than they get anywhere else," and otherwise "they’d be left to figuring this out on their own."
Nor is it necessarily a conflict of interest, he said. “I’m no different than Inside Higher Ed, where by the way, we’ve paid for advertising in the past.”
Searching for the Right Loan
Shireman has had his own mixed experience with Simple Tuition. In a blog post at the Institute for College Access & Success, with which the Project on Student Debt is affiliated, he described the process of comparing loans online and analyzed the offers he was given.
"Public confidence in college financial aid offices has been shattered by revelations of gifts, trips, deals, and kickbacks from lenders. In the resulting confusion, I have been asked time and again: 'Is there a Web site you can recommend where students can get accurate, complete and unbiased comparisons of student loan rates?'
"Unfortunately, the answer is no," he concluded.
In his review, Shireman found that the listed loan rate is often different from the actual rate that would be charged to consumers. Rather than an exact match, sites will list "as low as" rates that could be significantly less than what a student would end up having to pay. For an M.B.A. at the University of California at Berkeley, the advertised 7.27 percent rate eventually became, once Shireman applied, 8.75 percent plus 4 percent in fees, or "the equivalent of between 9 to 10" percent, he wrote.
Simple Tuition has experimented with different ways of displaying the range of loan rates, Walker said, and the site currently offers a variety of viewing options for customers. "We’re very consumer focused; we always reveal the total cost of borrowing in the [annual percentage rate]," he said.
Walker explained that the site also returns loan offers from companies that aren't advertising partners, which it can do by collecting publicly available information on the loans. But since many such lenders are repricing or restructuring their offerings in the wake of recent economic turmoil, Simple Tuition has had to temporarily reduce the number of non-paying lenders on which it offers comparison data (from about 40).
So what other options are there?
In an interview with Inside Higher Ed this summer, Cuomo said his office hoped to use some of the $12 million-plus in payments it has collected from lenders and colleges in student loan settlements to help design or finance an “objective” source of information about which loans are best for individual students, most likely through an online database. Officials from his office did not return comment seeking information about where that idea stands.
Back in April, Michael Dannenberg, director of the Education Policy Program at the New America Foundation, suggested a "reverse auction" model in which the New York attorney general would essentially supervise a private market place in which lenders would make bids for students' business. With that kind of independent model, presumably no advertising would be necessary to sustain the operation. Similar proposals for a national loan clearinghouse have circulated during the Senate Higher Education Act reauthorization process, although nothing has materialized so far.
In the private-sector Wild West, however, new approaches are still being tested. A Web site called Student Loan Scout has plans to launch next month with a different twist on the third-party comparison model. Currently in the pilot phase, the site would allow students to submit a single application that would be sent to lenders with matching products. After an underwriting review, the site would return only pre-approved offers from individual lenders, meaning that the rates given would be exact rather than a range or "as low as."
"Providing that the application data is accurate, then that is the pricing that the applicant would receive," said Ulrika Myggen, the CEO of College Advance LLC, which operates the site.
A potential downside is that individual credit checks for each lender could hurt a customer's FICO score -- an issue Walker is examining as Simple Tuition considers a similar arrangement next year.
The revenue model is not ad-based but relies on a "nominal fee" from lenders that use student data from the site's universal application. Myggen said college financial aid offices have already shown interest in linking to the service from their Web sites, provided that they approve the list of lenders partnering with Student Loan Scout.
But it might be an uphill struggle: The New America Foundation reported recently on some colleges that still try to "steer" their students away from non-approved lenders. Watkins and other financial aid officers, meanwhile, would argue that colleges are trying to shield their students from false advertising and contradictory claims.
"It’s been an interesting past year so we can really review and look again at how we use student loans, and cause a dialogue," she said.
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