Navigating the College Student Loan Minefield
The student loan industry hasn’t been doing so well in the public relations department lately.
Many schools include private loans as part of their financial aid packages, presenting them as if they were part of an award. They’re often not forthcoming about the price tag on these loans; the interest rate can be extremely high. And recent investigations have revealed that many colleges are accepting payment from lenders for sending them new business.
The student loan scandals have spurred several new House and Senate proposals that attempt to put limits on lenders’ sophisticated and sometimes unethical marketing practices. It has also caused some to call for parents and students to be more careful in protecting themselves.
A College Student Loan Scandal Epidemic
It’s becoming more common for lenders to use unethical practices in convincing colleges to favor them in their financial aid packages. Andrew Cuomo, the attorney general of New York, recently announced that over 100 schools were being investigated for questionable relationships with lenders.
Many of the schools listed are widely recognized institutions such as the University of Pennsylvania and NYU. Both of these schools received funds from Citibank for passing loan business their way. The schools have agreed to reimburse $3 million to students, and Citibank is promising to donate $2 million to a national fund for student loan education.
Other lending companies have been caught in the crosshairs as well. Sallie Mae, the country’s largest student loan firm, has also agreed to donate $2 million to the student loan education fund. In addition, the company has agreed to adopt a code of conduct managing its student loan practices.
Washington Takes Action
Codes of conduct and hefty donations might be a step in the right direction, but it’s not enough to ask the lending companies to regulate themselves. The U.S. House and Senate have introduced bills that require lenders to disclose their relationships with colleges to parents and students.
The new bills also encourage more borrowing through government loans. These loans often have better rates than private loans do. But many students don’t take out as many federal loans as they could because they are not informed of their options.
Some experts believe the federal loan situation is part of the problem. The price tag for college tuition has ballooned in recent years. But government financial aid hasn’t gone up along with it. This created a gap that the private market was quick to fill.
Advice for Parents and Students
There’s no question that these new developments simply add to the stress for parents and students looking for a realistic way to pay staggering college tuition bills. But until new regulations are passed, the burden will stay on their shoulders.
There are endless options for student loans—and the choices only add to the confusion. Colleges offer financial aid packages that include high-interest private loans. Direct-to-consumer advertising for student loans is becoming more common; many lending companies have started spending money on direct mail and Internet marketing.
And yet with all the choices, parents and students often feel locked into the loan offered by their colleges. In addition, many borrowers aren’t told about low-interest alternatives to private loans.
If you’re considering financial aid packages, the best thing you can do is to get the facts about the interest rates early on. This won’t necessarily be easy. The private lender will tell you that theirs is the best rate out there, and the college won’t be in a hurry to disclose the interest rate.
Most of the time, colleges don’t tell borrowers the interest rates on private loans until several months into the process, after students and parents have spent a lot of time filling out paperwork to apply for that specific loan. By then, most people feel they have no other choice, and they sign up no matter what the interest rate is.
The advertised payment amount can also be misleading. Lenders often disclose monthly payment amounts that are based on a repayment schedule of twenty or thirty years. If you want to pay off your loans faster, your monthly amounts could add up to a great deal more.
The financial aid advisor’s role should be to help students and parents navigate the student loan minefield to find the lowest-rate loans possible. While some colleges have been found to have conflicting interests, there are still many financial aid professionals who make students and parents their top priority.
However, a student’s loan situation can make a big impact on her career choices. The decision is too important to trust a single advisor to give the best information. Whenever possible, double-check what you’re told with other financial aid officers—or go straight to the director of financial aid.
Whether you’re a student or a parent, it can be easy to take any loan that comes along, assuming that the payments will be possible after the student graduates and lands a good job. But student loan debt doesn’t just cripple graduates financially. It also limits their options—often for decades.
With a great deal of debt, graduates are often kept from taking chances with their careers—chances that could pay off in the long run, either financially or in terms of greater happiness. Student loan debt can keep graduates from taking risks such as switching to a less lucrative but more personally rewarding career, starting their own business, or going back to school for an advanced degree.
The decision is too important to leave to chance—or to allow yourself to be pressured into taking a loan you don’t have all the facts on. Until the law catches up to the lending companies, parents and students must be vigilant in protecting their own interests. Get the facts on any loan early on, and it will pay off in the long run.
The Courier Journal: Student Loan Scandal
MSNBC: Large Student Loan Firm Settles With N.Y. AG
Reuters: Revolving Door Eyed in Student Loan Scandal
New York Times: Sallie Mae Agrees to Student Loan Settlement
CBS News: Student Loan Settlement Announced
Attorney General Andrew Cuomo: Press Release
NASFAA: Senator Kennedy’s Student Loan Sunshine Act
More About Understanding Student Loans
- Credit Repair Services You Should Never Pay For
- Questions You Should Ask Before Applying for Student Loan Forbearance
- The Bank on Students Act: What It Is, and How It Could Help Student Borrowers
- How the Death of a Co-Signer Can Affect Your Student Loan
- Peer-to-Peer Student Loans: What They Are, and How They Can Help You Pay for College
- If You're Unable to Work Because of a Disability: What Happens to Your Student Loan?
- New Rules for Debt Collectors: How They Could Affect Your Student Loan
- Having Trouble Repaying Loans? The Department of Education May Be in Touch