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Scary Education Story: Preferred Lender Scams

October 31, 2006

I have a personal, scary Halloween story for you about financial aid and “preferred lenders” in higher education. Please bear with me, however, because the narrative must be abstracted for professional reasons:

When I first attended a certain university, many years ago, that university’s financial aid office confronted me with a set of lenders about which I was unfamiliar. This was at first disconcerting, but I adjusted, took out my guaranteed (now called “subsidized”) student loans with this unfamiliar lender, and proceeded with my education. My focus was the classroom, and all else was a distraction. Who cared about the loans (they were government sponsored, right!), when I was desperately striving to enter the middle class and pursue the American dream?

Many years later, when it came time to consolidate those loans, by chance I discovered that the consolidation terms of my lender were not advantageous. For instance, the lender offered no incentives for online and on-time payment (i.e. lowering interest rates), and I found their customer service to be inadequate.

Since I was receiving all sorts of unsolicited consolidation offers in the mail from other lenders, I applied to consolidate through one of them – a company in California. When I was denied, I was surprised to learn that a rule existed that one must consolidate only through lenders from whom one has borrowed. You can’t consolidate with Z if all your education loans were through X and Y.

Since I was technically still a student at the time of consolidation, I went back to my university’s financial aid office and sought advice. A kind, sympathetic official there suggested that I take out a final loan through the company with whom I hoped to consolidate. I mentioned one, and he said that they were not a “preferred lender” of the university, so I’d have to seek a special exemption from a higher up in financial aid.

When I did this, the higher up asked me several questions and actually warned me of potential dire consequences. He did excite worry in me, but I persisted. I was surprised at this official’s response to my choice for a new lender, because they were – and are currently – a MAJOR lender with whom many, many other students and institutions seek loans. He eventually but reluctantly granted the release to my new preferred lender.

Thanks to a New York Times story published today, vaguely titled “Loan Company Cancels a Trip for Educators,” I now understand what happened to me many years ago: the higher-up in my university’s financial aid office was likely receiving heavy incentives, either from his own supervisor or perhaps lenders themselves, to stear students away from alternatives. My seeking another lender was likely affecting either that official’s or the university’s bottom line. I was undermining a potentially monopolistic situation for a lender.

My story aside, here are some highlights from the NYT story:

– “The student loan company [EduCap Inc.] that invited university officials and their spouses to an expenses-paid education summit meeting there has canceled the event. George Pappas, a senior vice president of the loan company, EduCap Inc., had said the purpose of the conference, which was to be held Feb. 2 to 5 at the Four Seasons Resort, was to discuss education, not loans. But some financial aid administrators have said the conference was EduCap’s way of wooing university officials who could steer student borrowers their way, for example, by putting them on so-called preferred-lender lists. Students rely heavily on the lists when choosing a private lender, and loan companies have come up with a range of inducements to persuade officials to steer borrowers their way.”
– “Michael Dannenberg, director of education policy at the New America Foundation, a public policy institute in Washington, called the cancellation ‘but a small victory for the integrity of financial aid,’ saying, ‘larger conflicts of interest remain.’ EduCap is a nonprofit company in the Washington area that has reaped billions of dollars in the lucrative student loan business.”

Perhaps others have heard of this scary ‘preferred lender’ scam, or have stories like mine? I wonder how long this set-up has been in place? I wonder who thought of it? I wonder how deeply banks are in the pockets of university officials? I wonder how many other students might be screwed by loans with less friendly repayment terms? – TL

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One Comment
  1. Hello,

    I recently published an article on the dangers and benefits of student loans and other forms of college financial aid – here is a quote from it, in case you are interested:
    Student loans repayment can be a real nightmare without adopting some strategies that would help the new graduates to organize their social and financial life. Here are some strategies they can use to do this:
    – An additional part-time job;
    – Freelancing is another option (meaning that they can do particular pieces of work for different organisations, without working all the time for a single organisation);
    – They should try to keep their living expenses as low as possible (live in a smaller apartment, live with a roommate to share some of the expenses, find an apartment that is closer to the job, to eliminate the extra-expenses for transport etc.);
    – To apply for forbearance (this is an immediate solution for hard times when the new graduate is in impossibility to re-pay the amount of money and the need for student loan consolidation becomes apparent; it is a temporary period, when the graduate can postpone or delay his or her re-payments until a later time on a federal or direct loan after the beginning of the re-payment, and when the student doesn’t qualify for deferral). The forbearance must be applied through the lenders of the loans.
    – To consolidate the payments.
    If you feel this helps, please drop by my website for additional information, such as federal student loans information or additional resources on private student loans .

    Regards,

    Michael

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