How to ensure student loans make the grade

As if borrowing money for college were not confusing enough, New York state attorney general Andrew Cuomo now charges that lenders and financial aid administrators are entangled in “an unholy alliance.”

Last week Cuomo charged the system is riddled with conflicts of interest, and Thursday he gave notice that he intends to file his first lawsuit in a broad and long-running investigation of the $85 billion industry.

Cuomo said he sent a notice of intent to sue Education Finance Partners Inc. in San Francisco. The company said it was “surprised and dismayed” by Cuomo’s announcement and is prepared to defend its business practices. EFP has five business days after receiving the notice to explain why it should not be sued.

Whether any laws were broken remains to be seen. But the blind faith parents and students historically have placed in their school’s financial aid advice is at risk.

And regardless of whether the alleged conflicts add to student loan costs, Cuomo’s message to borrowers is clear: Pay closer attention when choosing lenders and to the ultimate cost of a loan. In short, shop around. 

“While the federal government sets the maximum rate of interest on these loans, lenders are free to charge anything less than that maximum,” says Raza Khan, president and co-founder of MyRichUncle, a private student loan company headquartered in New York.  He feels too few borrowers realize they can use this competitive factor to their advantage.

Because lenders offer interest rate discounts and rebates that can save hundreds or thousands of dollars, borrowers should apply to several different lenders, suggests Mark Kantrowitz, publisher of, a Web site owned by devoted to improving transparency in the financial aid arena.

Look beyond preferred-lender lists
“You are not required to use a lender from the college's preferred lender list,” explains Kantrowitz.  “Colleges are required to certify loans from all education lenders, even if they are not included on their preferred lender list.” Yet reports the first lender on a preferred list often receives 75 to 95 percent of that school’s loan volume. 

This is not entirely reflective of laziness or failure to explore options. Some schools have negotiated compelling deals with their preferred lenders on behalf of their students — using their pull with lenders to their students’ advantage. 

Other schools feature lenders who, though they may not be the "lowest cost" options for their students, offer what they feel is the highest-quality package in terms of service.

Then there are schools that may have ‘sold’ the positions on their lenders lists, typically receiving money or services used to help other students, including those who do not qualify for traditional aid.  These arrangements are not prohibited under current regulations, but they are rarely disclosed to parents and students.

In the case against Education Finance Partners, Cuomo says the company had arrangements with more than 60 colleges to reward the schools for sending it student customers.

As an example, Cuomo’s office said Boston University would get 0.25 percent of the net value of loans if the total reached more than $1 million. The reward level could rise to 0.75 percent for loans in excess of $10 million.

Colin Riley, spokesman for Boston University said the school is “providing information as requested by the attorney general” but declined further comment.

Other schools that had similar agreements included Baylor University, Clemson University, Duquesne University, Drexel University, Fordham University, Long Island University, Pepperdine University, St. John’s University, Texas Christian University, Graziado School of Business, Washington University and the University of Mississippi, Cuomo said.

At least one school got more than $100,000 in kickbacks from EFP in a single year, said Cuomo, who is investigating at least 100 schools.

EFP Chief Executive Tamera Briones questioned whether the arrangements were illegal and  said many colleges use the financial arrangements to fund student aid programs and said they add no cost to the borrower.

In any case, knowing what criteria colleges use to compile their lender lists would help borrowers determine how much to rely on them.

Some schools do make public disclosures, including Rhodes College in Memphis, Tenn., which addresses the criteria behind its preferred-lender list on its Web site, and Fordham University in New York. But at most schools, borrowers need to ask if they want to understand potential conflicts of interest.

Hidden costs
“All it takes is one late payment to increase the cost of a loan,” explains Susan Fischer, director of student financial services at the University of Wisconsin in Madison. She said some lenders offer an on-time payment discount to make their loan offers appear lower in cost. But she estimates that only 10 percent of her students ever receive such on-time payment discounts, which nullifies the low-cost assumptions that may have led them to the loan.

This is why she, like Kantrowitz, encourages her students to pursue more easily met incentives when selecting among loan terms. These include enrolling in electronic funds transfer programs or taking advantage of other types of loans that offer reduced fees.

Because of all the moving parts that can impact a loan’s ultimate cost, comparing loan offers, while essential, is no cakewalk. offers online calculators to help analyze lenders’ terms, and plans to debut a new calculator in the next several weeks that will make comparing loan discount offers much faster and easier.

Like mortgages, student loans are often repackaged for sale to investors. This should not pose a problem, says Khan, unless the resale will negate some of the terms of the loan, like the performance discounts. He suggests that if a lender is being chosen for the discounts that will apply when repayment begins, borrowers receive written guarantees those terms will hold true for the life of the loan, regardless of who holds it.

Trust, but verify
Despite the concerns raised by Cuomo and the obvious need for improved disclosure, Kantrowitz says college financial aid administrators remain a good source of advice, especially on the quality of a lender's customer service.  “When alumni have problems with a lender, one of the first places they turn to for help is the financial aid office at their alma mater,” he adds.

College financial aid offices also are likely to be familiar with federal, state, local and institutional aid sources.

“We are a hard-working professionals dedicated to our students," says Fischer. "We share information constantly, even shamelessly, in order to get our students through college." This is why she finds it hard to believe the more serious accusations being leveled at her profession will stick.

But whether or not instances of payoffs or corruption are found, borrowers should know their rights when accepting student loans and exercise them. They also should know they have recourse.  If they have concerns about a school’s willingness to work with their lender of choice, they can contact the student aid division of the Department of Education.