Types of loans include Stafford loans (subsidized or unsubsidized) and PLUS loans (usually taken out by parents of undergraduates or by graduate students themselves). Known as Title IV loans, they are guaranteed by the federal government. Alternate loans to help finance education costs come from private lenders, which are neither subsidized nor guaranteed by the federal government.
In a press release from the Office of the Attorney General, Andrew M. Cuomo advised college-bound students to protect themselves from deceptive student-loan practices. Understanding these practices will help them select the best lender for their situation, especially if the college or university is steering them toward a particular lender.
In his ongoing investigation into the student loan industry, Cuomo requested information from more than 60 public and private colleges and universities nationwide regarding lending companies that are included on a school’s “preferred lender” list.
Cuomo revealed some of the problematic practices the investigation discovered:
- Lenders pay financial kickbacks to schools based on a percentage of the loans directed to the lenders.
- Lenders provide all-expense-paid trips for financial aid officers (and their spouses) to high-end resorts.
- Lenders put representatives from schools on their advisory boards.
- Lenders set up funds and credit lines for schools.
- Lenders offer large payments to schools to drop out of the direct federal loan program so that the lenders get more business.
- Lenders sell loans to other lenders, often eliminating the benefits originally promised to the students.
Cuomo requested information from six lenders -- Sallie Mae, Nelnet, the CIT Group, the College Board, EduCap, and Education Finance Partners – in his efforts to uncover deceptive practices in the student loan industry. His concern is that the financial arrangements between lenders and schools are filled with the potential for conflicts of interest, or even break the law.
Cuomo announced that JP Morgan Chase and Bank of America have joined Citibank and Sallie Mae in agreeing to his Student Loan Code of Conduct in their student lending practices. With the top four lenders raising the bar, the student loan industry is on its way to establishing high ethical standards and best practices that will benefit students and their families.
The Student Loan Code of Conduct includes the following provisions:
- Ban on payments for preferred lender status.
- Gift and trip prohibition.
- Loan resale disclosure.
- Ban on financial ties, which severs inappropriate financial arrangements between lenders and schools, and specifically prohibits revenue sharing arrangements.
- Lenders are prohibited from paying college employees anything of value for serving on the advisory boards of the lenders.
- No employee of a lender may ever work in or provide staffing assistance in a college financial aid office.
- Disclosure of range of rates and defaults to ensure schools have the information they need to select the best preferred lenders for students and parents.
The Attorney General’s office has prepared a pamphlet to help those seeking student loans make more informed decisions.
