When administrators at Columbia College Chicago were weighing whether to provide students with a list of recommended lenders, they began digging for information on a five-year-old federal requirement that colleges submit annual reports justifying their choices. Finding none, Brooke Kile, a college official, turned to an e-mail list for the student-aid profession.
“I see what information would need to be included, but I can’t seem to find where or how this information needs to be provided,” she wrote in a posting last month. “Are we still waiting on guidance?”
The response from her colleagues and lenders on the list was unanimous: The Education Department never created a form for collecting the information, or designated an office to receive it.
Asked about the exchange, department officials confirmed that they were not collecting the annual reports, in an effort to ease the burden on institutions. Instead, they said, they evaluate the information, known as preferred-lender lists, during program reviews, which tend to focus on institutions with known or suspected failings in other areas. Since institutions can go for years without a review, that means a majority of lender lists have never been vetted by the department.
The pattern troubles consumer advocates, who pushed for increased scrutiny of the lists in the wake of a “pay to play” scandal, in 2006-7, that shook the student-aid profession and ended the careers of a half-dozen college administrators. The reporting requirement was designed to ensure that institutions listed lenders that offered the best terms and conditions, not those that provided kickbacks to the colleges.
“Policy makers need to know what’s actually happening with preferred-lender lists, especially given the history of deceptive marketing” of private loans, said Lauren Asher, president of the Institute for College Access and Success.
Prohibiting ‘Inducements’
Preferred-lender lists became popular in the 1990s, as a way for colleges to rein in their students’ rising loan-default rates. By recommending lenders with high-quality customer service, colleges hoped to reduce the number of students who ended up defaulting on their loans. As the loan industry grew and competition increased, the lists became a way for aid administrators to steer students to the best deals.
At the same time, they also became a tool to extract perks from lenders—for borrowers, for the institution, and, occasionally, for the administrators themselves. In exchange for a lucrative spot on a college’s preferred-lender list, lenders offered, or agreed to, sweeteners such as revenue-sharing and recourse loans for high-risk borrowers.
Those practices came to an abrupt end in the mid-2000s, when Andrew M. Cuomo, then attorney general of New York, conducted a bruising investigation into the industry, exposing the often cozy relationships between colleges and lenders, and suggesting that borrowers were paying higher prices as a result.
In 2007 the Education Department responded with rules that required colleges to include at least three lenders on their lists; to disclose the criteria they had used in crafting the lists, along with the terms and conditions offered by the lenders; and to notify borrowers that they were not required to choose a lender from the lists, as many students had assumed.
The new rules barred colleges from assigning first-time borrowers to a specific lender or loan guarantor, or refusing to certify loans from lenders not on the lists, and provided an exhaustive list of “inducements” that colleges could not accept from lenders.
At the time, colleges and lenders complained that the rules were too burdensome and would force them to abandon the lists, leaving students at the mercy of direct marketers. Critics argued that the three-lender requirement was arbitrary and warned that they could not guarantee the accuracy of the lenders’ terms and conditions.
But the department stood firm. In justifying the rules, federal officials wrote that they were necessary “to preserve a borrower’s right to choose” and would “ensure that such lists are a source of useful, unbiased consumer information.”
The regulations took effect on July 1, 2008, almost exactly five years ago. A month and a half later, Congress codified many of the rules in a bill that reauthorized the Higher Education Act, the main law governing federal student aid.
In that legislation, lawmakers took federal oversight a step further, requiring colleges with preferred-lender lists to submit annual reports detailing their choices to the secretary of education, the public, and prospective students.
Fewer Lists, Little Oversight
At the time of the department’s crackdown, nearly 900 colleges conducted nearly all of their student-loan business through a single lender, according to a letter sent to the institutions by the department. Data collected by Student Marketmeasure Inc., a market-research firm, showed that 1,412 colleges had 80 percent or more of their federally guaranteed student loans provided by a single lender, and borrowers at more than a third of those colleges received all of their loans from one lender.
These days, all federally guaranteed loans come from a single lender—the U.S. government—and preferred-lender lists for guaranteed loans, like bank-based lending, have disappeared. But many students still finance their higher education with private loans, and the National Association of Student Financial Aid Administrators, or Nasfaa, says few colleges offer lists of private lenders, too, largely because of the burdens associated with compiling them.
In the 2010-11 academic year, only about 15 percent of colleges created preferred-lender lists through a formal process, according to a survey by Student Lending Analytics, a group that advises colleges on loan selection. Instead, 34 percent of the colleges that responded to the survey said they had listed every lender that students used in the past three to five years; 30 percent did not provide any list; and 11 percent referred students to a third-party Web site.
This past February, a Nasfaa panel recommended that Congress ease up on the reporting requirements for preferred-lender lists, arguing that most abuses had involved guaranteed loans, not private loans. The rules, the panel wrote in a report, were preventing administrators from “giving reasonable advice to families,” so that “students are often swayed by marketing and advertisements.”
“Today, the financial-aid community is well aware that institutions cannot gain any benefit from the business their students do with private lenders,” the report said. “Institutions should be allowed to provide more useful and comparable information on private loans to students ... without being tied to a litany of rules.”
But consumer advocates contend the lists should be subject to greater scrutiny, particularly now that the private-loan market is starting to rebound, after contracting during the recent credit crunch. They cite research showing that borrowers tend to choose lenders at the top of their institutions’ lists, and warn that the potential for abuse remains.
“Borrowers still do not have adequate protections,” said Ms. Asher of the Institute for College Access and Success.
Mr. Cuomo, who is now governor of New York, did not respond to a request for comment. But the Education Department, after saying that it was not collecting the reports, said in another e-mail that it was developing a process for compiling and reviewing colleges’ submissions.
To date, the department’s program reviews have turned up problems in seven colleges’ lists, with six failing to disclose the method and criteria they had used to choose lenders.
