Should You Use Your College's Preferred Lender List?
During the financial aid process, your college will likely present you with a list of “preferred” lenders to cover the amount of tuition not covered by your family’s expected contribution, federal loans and grants, and other forms of financial aid.
This list is supposed to represent the best lenders to work with—but best for whom? Students and parents who are a bit suspicious of these lists have good cause to be. In 2007, numerous colleges were found to be in illegal partnership with banks, funneling students into private loans that didn’t always provide the best terms. Both banks and financial aid officers profited—at the expense of students.
After the private loan scandal, colleges became a lot more careful. Many provide detailed information regarding their connections with private lenders in their financial aid documentation. But what does it mean that a bank is on a college’s “preferred lender” list—and after the student loan scandal, can it be trusted?
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Preferred lender lists are supposed to highlight the lenders that offer the best terms for students. But they might not offer the most up-to-date information out there.
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Today the industry is more heavily scrutinized—and many colleges go out of their way to assure students and parents that there are no improper relationships between their financial aid offices and the banks on their preferred lender lists. But there’s still a benefit to colleges in offering these lists. They help cut down on the number of lenders colleges must deal with on a regular basis—reducing paperwork and administrative costs.
According to FinAid.org, colleges often resist adding new lenders to their lists. The reason for this is that there are hundreds of lenders out there, each offering dozens of student loan options with terms that change frequently—and the college has limited staff. In addition, it can be administratively difficult to handle paperwork from a larger number of banks. Because of this, preferred lender lists may not always accurately reflect the most current information—and banks that make the process easier for colleges are more likely to get on the list.
And banks have an incentive to get on the list. As FinAid.org states, the first bank on the list usually gets most of the business from students—up to 95%. This can translate into millions of dollars in new loans. Banks compete hard to get on those lists.
But there are rules affecting what banks can and can’t do. For example, lenders can’t pay for college expenses or make payments to an intermediary association such as a student organization or school department. Banks can’t compensate colleges financially for loan business. They can’t pay inducements to individual employees or students. This was a big part of the 2007 student loan scandals—banks were giving colleges, and sometimes individual financial aid employees, large cash payments as well as fancy dinners and other gifts in order to persuade them to send student loan business their way.
There are also rules for colleges regarding preferred lender lists. While colleges aren’t required to have them by law, colleges that do have them must list at least three separate lenders. Colleges can’t force families to borrow only from lenders on the list; students are able to borrow from any bank. In addition, colleges can’t take an unreasonably long time to certify a loan from a non-preferred lender.
So should you choose a lender from your school’s preferred list? It depends. Preferred lender lists are supposed to highlight the lenders that offer the best terms for students. But they might not offer the most up-to-date information out there—and it’s possible a non-preferred lender could offer a better deal the school just hasn’t found out about. In addition, while schools shouldn’t accept illegal inducements from banks, the banks have a big incentive to get on the list—and compete heavily to persuade colleges without violating legal limitations.
So do your research. Check out the loans offered by the school’s preferred lenders, but don’t be afraid to go off the list and see if you can find a better deal. This decision will affect your student loan conditions—and your financial life—for many years after you graduate, and a little extra time spent on research now could save you a lot of headaches down the road.
Sources
Sources:
FinAid.org: Illegal Inducements and Preferred Lender Lists
MSNBC: Student Loan Scandal Grows
Post-Gazette: Private Student Loan Scandal Yields Reforms
Distance-Education.org: Marketing Rules for Student Lenders: How They’ve Changed
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
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