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The all too weird preferred lender list

Jeremy Rabson - October 17, 2014

The all too weird preferred lender list

Students all around the world are trying to figure out their loan options.  They consult multiple sources of information, including message boards like TopMBA, general information sites like FinAid, lender websites like ours, and most importantly, schools’ financial aid sites.  The process can be very hit or miss and oddly enough, school financial aid sites can be among the biggest misses – particularly in the U.S. market.  Why? It’s an interesting story of kickbacks, regulation, and legal interpretation.

A brief, yet significant, history of preferred lenders

Prior to 2007, most U.S. universities had a “preferred lender” list.  Student lending companies had significant sales teams that would meet with school financial aid officers and sell them on the benefits of their lending platform.  For the most part, financial aid officers worked diligently to pick lenders that they thought provided the best terms to students along with solid service.

The problem, however, is that there is a conflict of interest between the student and the institution because there is an incentive for a financial aid office to pick lenders that use platforms that simplify the processes (reduce work) and to work with companies that might help deal with challenging student situations.  What ended up happening was not surprising: some schools took kickbacks in the form of direct payments or support services for steering loan volume to specific lenders and some schools had semi-explicit agreements to steer students to a particular lender in exchange for the lender making loans to students who might otherwise have been ineligible.

In early 2007, the New York Attorney General’s office (led by now governor Andrew Cuomo) learned that one particular lender was sharing loan profits with schools in exchange for being added to the preferred lender list.  Just a few months later, after a series of rapid developments (see the full story) many schools signed off on the Cuomo College Loan Code of Conduct.  The code prohibited revenue sharing, gifts, and compensation and required that schools create preferred lender lists solely in the best interests of the student and that the criteria for lender selection be clearly disclosed.  New York State put the Code into law and similar requirements were put in place by the Federal government.

Schools opt out of preferred lenders; students have little guidance

The fallout from the scandals has tended to transfer the burden of loan investigation to students.  Many universities have chosen not to provide students with a preferred lender list because they are concerned about the documentation required to fully disclose selection criteria.  Some institutions provide no information on different domestic lenders - for example, the business schools at Harvard and Yale.  There are other programs that provide a list of lenders, which will consist of any lender that has made more than a certain number of loans to students at the school.  As a general rule, students need to rely on their own legwork to identify the best student lenders. Often, that comes down to whichever lender leaps to the top of Google’s search network – frequently the ones that are willing to bid highest for the lead..

On the international student side the same things tend to happen, although with a twist.  As discussed in my post on the state of the U.S. market, a number of top schools have guarantees in place with specific lenders.  Because of the limited competition for international student loans, the schools will direct students to the partner lender..  Other schools feel that endorsing a loan option is a violation of the preferred lender list and will direct students to multiple lending programs wherever they might be located around the world.

The pluses and minuses are clear: direct the students to your partner program and they are virtually guaranteed a loan without spending too much time looking, but at potentially higher cost. This is of course, not always in the students’ best interests.

What is interesting is that by setting up a guarantee program and directing students to those lenders, schools are undoubtedly creating a preferred lender list, but few have actually spelled out the criteria for participating.  Of course, it is also unclear whether the preferred lender list laws ought to apply to schools when dealing with non-citizen borrowers, and so for now the complexity continues.

A new way forward for international lenders

Ultimately, we believe that schools will choose to provide their international students with loan alternatives in the form of a lender list (not preferred).  That will happen because giving students a choice is the right thing to do, and because providing a list with a single lender seems to clearly violate the spirit of the Code of Conduct – even if the students are international.

Schools have ended up with their current solution because previously there were minimal loan options for international students. But with Prodigy Finance in the USA it’s time for them to reexamine the current solution.

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