Student Loans and Options
Shopping for a student loan used to be as simple as picking a lender off your school’s “preferred lender list.”
Offered by almost all colleges and universities, preferred lender lists singled out on average four or five lenders that the school’s financial-aid office deemed would offer its students the best loan terms and customer service. Not surprisingly, the lenders in those lists typically received up to 90% of the loans taken out by that school’s students and their parents.
Earlier this year, an industry wide probe was started into just how these lists are put together. There findings are changing how students and their parents should shop for student loans. Turns out, lenders have been paying their way onto preferred lender lists for years. The financial-aid offices of many colleges and universities received kickbacks from lenders based on how much students borrowed, in addition to accepting free travel and gifts. Some financial-aid officers were even offered stock in lender companies.
Thanks to the ongoing scandal, colleges are scrambling to clean up their acts — and their lists. Nevertheless, if you are planning to take a loan for the upcoming academic year, reaching for your school’s preferred lender list — if still available — is not enough. You will have to shop around, study your options and ask many questions. Here is how to find the best loan for your needs.
Some universities have temporarily suspended preferred lender lists because of the investigation, but many continue with the practice. Do not automatically discard the lenders your school recommends, but think of them only as a starting point. Be sure to ask your school what benefits you “the student” will receive if you go with a preferred lender. Then ask what benefit they “the school” will receive as well.
Scrutinize the list: In the past, schools often listed several preferred lenders that were owned by the same company. One such college had a list of five companies, four of which were owned by one of the nation’s largest educational lenders, while the fifth sells the student loans it originates to that same lender. That is possibly a sign that the school had some sort of deal with that lender: a red flag to look into other lending options, which may turn out to be more attractive.
Be careful if your school tries to discourage you from using an outside lender — you are in no way obligated to stick to the list. Granted, there may be some delays inherent in using a lender that does not have a relationship with your school, but that should only add an extra day or two for processing. If the school starts talking about a delay of weeks and tries to discourage you from going with your lender of choice, then they are not complying with federal regulation. Take such cases to the Federal Student Aid Ombudsman, which helps resolve student loan disputes.
The thought of researching all student loan options out there can be daunting. Thousands of banks, credit unions and other institutions offer loans. However, it is the largest lenders that do the majority of the business: In 2006, the top 50 lenders represented 83% of loan originations and 96% of consolidations.
FinAid.org lists about 300 lenders along with contact information and links to the company web sites. You do not have to go through all these options, of course. Pick several lenders that you are already familiar with or that have been recommended by somebody you trust, perhaps other parents with children close in age to yours. Better to add just a few lenders to your school’s list and study their products well, rather than pick one lender out of 50 without reading the fine print.
