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Domination by some student lenders raises concerns

WASHINGTON — College students trying to cover the soaring cost of a post-secondary education have more than 3,000 federally qualified lenders to choose from — at least in theory.

At 921 colleges, universities and trade schools last year, a single lender handled the majority of federally backed student loans that help pay for tuition and related expenses.

That has federal officials and student groups concerned that some schools may be improperly steering borrowers to lenders the schools prefer to use, regardless of whether it’s the best deal for the student.

Federal education officials sent letters to the 921 schools June 29, reminding them they’re barred from pressuring students to choose a specific lender.

“When we see patterns that are troubling, we will act on them,” U.S. Education Secretary Margaret Spellings recently told reporters. Such steps could include regular monitoring, fines and, in the worst cases, removal from the federal loan program.

Education officials say the letters weren’t based on any evidence of wrongdoing. But probes earlier this year spotlighted unethical behavior by financial aid officers at several schools.

Data obtained by Gannett News Service under the Freedom of Information Act shows the 921 schools that received letters are located in 46 states and two U.S. territories. They range from well-known state institutions to trade schools that specialize in vocations such as nursing, cosmetology and cooking.

A single lender handled every federally backed student loan at 239 of the schools, mostly smaller career institutions, according to the data. At another 400 schools, a single lender handled between 90 percent and 99 percent of student loans.

Sallie Mae, the nation’s largest private provider of federal student loans, topped the list of dominant lenders. Sallie Mae handled the majority of federal student loans at 209 schools in 2006-07 and lent a total $1.4 billion.

Other dominant lenders include: Citibank Student Loan Corp. (75 schools), Bank One (39 schools) and Wachovia Education Finance Inc. (35 schools).

Not everyone agrees that focusing on schools where one lender dominates the loan market is the best approach. Haley Chitty with the National Association of Student Financial Aid Administrators calls the strategy “overly simplistic.”

He said most schools already recommend at least three lenders, based on such factors as loan terms, borrower benefits provided and customer service. They have developed such lists because families asked them for help navigating the complex world of loans, he said.

“Market share is not an indication of the loan terms and benefits that students receive,” he said. “If a school has five lenders on a preferred lender list and one lender has the best loan rates and borrower benefits, it would make sense that most students chose that lender.”

Education officials said they will visit some of the 921 schools that received letters but declined to say why. One of those schools is Middlebury College in Vermont.

During the 2006-07 school year, a single lender — the National Education Loan Network, or Nelnet — accounted for 96 percent of the $7.6 million in federal loans at Middlebury.

The school recommended Nelnet to student borrowers as part of a temporary arrangement while the school switched from one federal loan program to another, said Patrick Norton, Middlebury’s associate vice president for finance.

Of nine lenders considered, Nelnet offered the best loan terms, he said.

“It was clearly disclosed that (students) could use any lender that they wanted,” he said. “We’re not in it to make money.”

For 2007-08, Middlebury has four lenders, including Nelnet, on its list.

Preferred lender lists are designed to ease confusion for students. But they can discourage students from shopping for themselves.

“An 18-year-old incoming freshman who has never borrowed anything before will look at the (preferred) list and assume it’s the better lender to choose from,” said Rebecca Thompson, legislative director for the United States Student Association, an advocacy group. “That’s often not the case. Students are not being educated about their options.”

In 2004, students left college with an average $19,200 in loan debt, according to The Project on Student Debt.

Most lenders handling federal student loans charge the maximum 6.8 percent interest rate allowed under federal law, said Thompson.

Federal loans max out at $5,500 per year. When that’s not enough, students often turn to the same lender for private loans because it’s convenient. Those private loans can carry much higher rates.

Lenders also differ in the fees they charge and how they reward borrowers who make timely loan repayments and punish those who don’t. Such factors can save or cost students thousands of dollars.

Michael Haynes, a senior at Eastern Michigan University who is carrying $80,000 in student loan debt, said he believes he could have saved money if he’d been less naive and gotten more guidance.

He said he relied on the school’s lender lists because the process was so confusing.

“I’m still overwhelmed by it. I still don’t know how it all works,” he said. “I need a financial adviser or a lawyer to know what’s going on.”

Eastern Michigan is not one of the 921 schools that received a letter from federal education officials.

Probes of other schools where one company dominated student lending found that lenders had given gifts to school officials in exchange for being placed on preferred lender lists. Some schools had allowed preferred lenders to staff their call centers and refused to process loan applications for students who chose other lenders.

Schools have begun adopting codes of conduct that bar officials from accepting gifts from lenders. And Congress has proposed requiring at least three choices on preferred lender lists and barring schools from recommending lenders in exchange for a financial reward.

The changes primarily would affect schools where students choose a private lender to manage their federal loans — about three of every four schools. At other schools, federal loan money goes straight to the school without students having to pick a lender.

Shopping for a student loan? Here’s some advice

For students trying to navigate the complex world of college loans, the Project on Student Debt, a nonprofit group in Washington, D.C., offers these tips:

• Borrow only as much as you really need.

• Talk to a financial aid officer at your college to see if you might be eligible for more grants even if you’ve been offered student loans as part of your financial aid package.

• Start with federal loans. Interest rates on Perkins loans (5 percent fixed) or Stafford loans (maximum 6.8 percent) don’t change over time and aren’t affected by your credit rating. They also come with some borrower protections in case you’re unemployed or have other financial problems after college.

• Avoid private student loans (sometimes called “alternative” loans) if possible. Even if they start with what seem like low rates, those rates can shoot up at any time. Also, they don’t have the borrower protections that come with federal loans.

• Beware of private loans in disguise. Some schools put their own name on private loans, or the loans may have other brand names that make them look safer than they really are.

• Shop around. If your school recommends borrowing from a certain lender or lenders, find out why. If you find a good rate on a private loan, keep talking to other lenders, and see if they will beat that rate. Make sure you get the final deal in writing, and that you understand the limitations and restrictions.

Federal student loan facts

Maximum amount per loan: $3,500 for freshmen, $4,500 for sophomores, $5,500 for juniors and seniors.

Average amount of debt after leaving college (2004): $19,200.

Total amount lent in 2006-07: $66 billion.

Total number of borrowers in 2006-07: 5.6 million students and 626,000 parents.