The staffers in the financial aid office pigged out on free barbecue lunches, after-work cocktails, lasagna, cupcakes, and other goodies that competing lenders provided. Jenny Craig isn’t the only one who would have disapproved. The office workers seemed more keen on filling their own stomachs than finding the best, most competitive lenders to place on their preferred lender list.
The dubious behavior didn’t stop with ice cream and barbecue
beef. The university’s director of financial aid was fired after it was
discovered that he had financial ties to a student loan company that
the school was recommending.
Unfortunately, the Lone Star imbroglio is hardly a fluke. Investigations
into what’s really going on in financial aid cubicles across the
country have uncovered other appalling business practices.
How financial aid offices behave is critical because millions of college
kids and their families can’t pay for a college education without
loans. Families borrow roughly $85 billion a year for college, and this
captive audience has attracted lenders who want to play financial hardball.
Some families began realizing they were being played for patsies
when an upstart lender, My Rich Uncle (www.myrichuncle.com), took
out newspaper ads in 2006 that accused some colleges of accepting
“payola” and “kickbacks.” The schools that engaged in this unscrupulous
activity would pocket the money or various perks after agreeing
to put the bribing lenders on their preferred lending lists and to bar
students from borrowing through competitors. Lenders are extremely
eager to land on a school’s preferred lists because families rely heavily
on them when selecting loans. The lists are supposed to contain loan
companies that will provide the best terms and rates for students.
Ultimately, the New York Attorney General’s office and others began
investigating, which led to a better picture of what was happening.
Here are some of the shenanigans that investigators uncovered:
College administrators were serving on lender boards of directors
and getting paid for their time. In even more extreme cases, lenders
paved the way for college officials to buy shares of their stock at cheap
prices that were later cashed in for tremendous profits.
There was also lots of nickel and dime stuff. Lenders rewarded aid
officers with tickets to the Rose Bowl and other sporting events. One
bank memo uncovered during an investigation by U.S. Sen. Edward
M. Kennedy, chair of the Senate’s education committee, suggested
employees bring a massage therapist to financial aid offices to provide
five-minute massages. The same bank suggested that all-female offices
would love complimentary pedicures and manicures.
In some cases, schools endorsed lenders and in return the schools
received a percentage of loan profits. Here’s how the arrangement still
works: A lender hands a school a large pot of money to lend to students
who wouldn’t otherwise qualify for loans because of credit problems.
These are sometimes called opportunity pools. In return, the college
recommends the lender for its preferred list.
College officials, who participate in this cozy arrangement, argue
that the schools don’t benefit from this influx of dollars, needy students
do. But their spin leaves out some troubling details. When a college
puts a lender on a preferred list in exchange for extra student loan
funds, the question that seems to be lost in this transaction is this: Is
this lender offering the best deals for the students? If not, the students
and their parents are getting saddled with inferior loans just so the
school can grab some extra cash.
And the questions don’t end there. The money in these opportunity
pools are private loans, which, as you’ll soon learn, are the worst
type of debt. The interest rate on these loans is rarely capped, and
there are few consumer protections.
These incestuous, hidden relationships extend beyond placing
lenders on preferred lists and making it difficult for students to look
elsewhere for loans. At some schools, financial institutions have
manned campus call centers that field inquiries from students asking
questions about financial aid. In many cases, students have no idea
that a lender, rather than a school financial aid officer, is providing the advice.
Lenders don’t seem to have overlooked any opportunity to reel in
potential customers, which is why lenders are just as interested in students
when they are on the verge of graduating. At some schools, for
instance, graduating seniors are required to attend an information session
that discusses loan consolidation and other concerns that could be
relevant to new graduates. In fact, some schools won’t allow students
to graduate until they sit in on a session. What these kids could be attending,
however, is a thinly disguised infomercial.
It is not hard to figure out why lenders want to talk with departing
graduates. The industry makes money on consolidating the debt that
students have accumulated over several years.
Obviously, the behavior mentioned in this chapter is despicable.
Some of the culprits have cleaned up their act, but others haven’t. If
you must borrow money to pay the college tab—and most families
do—you’ll learn how to protect yourself in the next four chapters.
Action Plan
Unfortunately, you can’t assume that a school will always make the
best recommendations for families who need to borrow money. Remain skeptical.
Source: The College Solution: A Guide for Everyone Looking for the Right School at the Right Price
