Posted: 05/02/07

Corrupt college loan lenders?
Preferred lenders and college officials under investigation

Meghan Louf | contributing editor
mlouf@smcvt.edu

There is speculation about the relationship between college financial aid administrators and the lending companies the colleges recommend to students.

According to a New York Times article, There has been an ongoing investigation of financial loan lenders for months. Some colleges were found to have been given things of value in exchange for the college to recommend the lender company to students.

Sweetheart contracts

According to New York State Attorney Andrew Cuomo, the University of Nebraska agreed to sign a deal with the student loan provider Nelnet in 2004. Cuomo says the university branched with a foundation which held a large amount of stock in Nelnet, and it was a major influence on the final deal. Cuomo who is referring to these deals as “sweetheart deals” has been asked to investigate 59 other schools. He has already addressed this issue with the largest student loan provider, Sallie Mae.

The St. Michael's College financial aid office and student accounts are located in Founders Hall. (Izabela Socha, photo)

According to the Higher Education Act, colleges are not allowed to make students use a specific lender, but they can suggest one. Therefore, lenders are trying to persuade colleges to place them on the list.

Vermont Student Assistant Cooperation’s (VSAC) in house attorney, Tom Little says that the more customers a lender has, the more interest the lender can drop from the student’s loan. Overall, it would bring more business for the company.

“Because nearly 90 percent of students not awarded scholarships use the recommended lenders to fund their education, Citibank and student loan companies such as Student Loan Xpress have made large profits.” Ryan Dozier, University of West Florida wrote in an article.

Vermont lender connection

VSAC provides grants, loans, scholarships, career and education planning, and general information about education beyond high school.

According to Little, the real competition lies in how low the interest on a student’s loan can go and how well the student can keep the rate. Lenders want it low enough so that students can afford it, but high enough that it will still keep the company running, he says.

Little says that VSAC borrows 200 to 300 million dollars from banks per year.

They pay this money back to the bank with additional interest using the money they get from students who pay off their loans with interest. The interest that has to be paid back to the bank is lower than what the students get and — the difference is what the company uses to keep running.

“We try to look at a students like a package...many students can make it all work with out a loan,” he says.

Preferred student-lender relationship

A student waits for assistance with his financial aid papers at the financial aid office. (Izabela Socha, photo)

St. Michael's sophomore Sarah Fleming says she has never had a problem with VSAC. They were recommended to her by St. Michael’s College and after looking it over decided it was the right fit for her financially.

“VSAC offered a good package and my parents agreed," she says. "All I have to do is call them to find something out.”

According to St. Michael’s College financial aid counselor Linda McGaughnea, VSAC and St. Michael's are very knowledgeable about the way they both function within their departments.

“I filled out my application with them over the phone so everything was clear,” Fleming says.

Fleming feels comfortable talking with the St. Michael’s financial aid department about her VSAC loans because they know VSAC pretty well.

McGaughnea says that the department does not receive any favors from lenders. St. Michael’s College has not been investigated to her knowledge. Although St. Michael’s College does recommend VSAC as a lender, students can choose any lender they want, McGaughnea says.

“Over the years most schools have been comfortable using us, Middlebury should have picked us, but they didn’t,” Little says.

Little says that VSAC is not connected to any practices that are under concern and investigation like other corporations. VSAC is also preferred by almost every Vermont College.

“VSAC has been a lender for St. Michael’s for 20 years,” Little says. “It’s due to the fact that we’re under federal loans as opposed to private.”

Federal loans usually have lower interest, longer repayment terms, and easier credit requirements, he says.

Fleming says that VSAC and St. Michael’s College seem to have a good relationship but that she was never pressured into picking VSAC.

“I don’t understand this whole situation. Where do people even think to corrupt college financial aid?” she says.