Student Loan Scandal Confuses Things Further

Student loans have been in the news lately as a scandal in the industry threatens to erupt after an investigation by New York state officials. What is the controversy, and why is it so threatening to students?

New York Attorney General Andrew Cuomo found that officials at Sallie Mae and Student Loan Xpress offered school officials improper benefits in exchange for placement on preferred lending lists. These lists are distributed by schools as a way for students to figure out which companies are reliable and a good option for financing their education. In theory, schools should base their list on the company's reliability and value alone.

What Cuomo found was rampant corruption in the process leading to how the preferred lender list was created. Sallie Mae and Student Loan Xpress offered financial aid officials all-expense paid trips, cash benefits, and sometimes even stock in the loan company itself in exchange for placement on the lists. Financial aid officials at some top schools received seats on the advisory boards of the financial aid companies. In some cases, the schools themselves received benefits in the form of a percentage of the interest of each loan from their students.

Cuomo forced Sallie Mae and Student Loan Xpress to stop offering these perks to college officials. Many schools accused of the impropriety, including New York University and the University of Pennsylvania, have agreed to pay back their portion of student loans to students.

Now, the student loan scandal is attracting congressional attention. Some lawmakers want to make the agreements Cuomo made with student loan companies binding nationally, and others want to regulate against the use of preferred lender lists by financial aid offices. Others want to require that universities have at least three different companies on their preferred lender list in order to counteract any potential bias.

This approach has been called heavy-handed by some, including Northwestern University officials who argue that their list is generated through a competitive review process, with no perks of any kind benefiting either the university or its officials.

What should students do? Take the preferred lending list with a grain of salt when looking for student loans. Inquire with financial aid offices as to how it was made and look into different options. There's no reason a school won't accept a loan from a source not on its preferred lender list. Recognize that while a school could have ulterior motives, many schools do provide the lists as service. Student loans can be confusing, and a preferred lender list written with the right reasons in mind can be a great help to students and parents.

Sources:
http://www.cnn.com/2007/EDUCATION/04/18/student.loans.congress.ap/index.html
http://www.cnn.com/2007/EDUCATION/04/11/student.loan.probe.ap/index.html
http://biz.yahoo.com/ap/070410/student_loan_probe.html?.v=5