The year-long national debate regarding student protection within the student loan industry has resulted in a critical reconstruction of the federal rules surrounding the industry according to a recent announcement by U.S. Secretary of Education Margaret Spellings . This overhaul looks to address what constitutes an appropriate relationship between higher education institutions and their preferred student loan lenders by barring student loan lenders from offering schools gifts in exchange for business, according to Casey Ruberg, spokesperson for the Department of Education. These rules also require that state national universities identify three independent companies on their preferred lenders lists.
"This has really been a controversy for quite some time and a large part of the problem has been the relationship between lenders and financial aid offices," Student Financial Services Director Yvonne Hubbard said. "The concern has been that some of these relationships have been a bit too close."
Investigators discovered some student loan lenders offering gifts to universities to ensure that they would be placed on a university's preferred lenders list, essentially bribing universities to recommend them to students, Hubbard said.
"Students who need to borrow from the federal government have to go through a lending institution, which is usually a bank, to be guaranteed a student loan," Hubbard said, "Some schools took money, office supplies or trips from lenders and agreed to place these lenders on their preferred lenders list. Needless to say that is not an appropriate relationship at all, which is why the government is trying to control it."
Though the University lists Bank of America as its preferred lender, Hubbard said the University receives no financial gain from the arrangement.
As part of Spellings' recently announced measures, government officials have sent letters to 921 colleges and universities across the country, asking them to clarify their relationships with their preferred lenders, Hubbard explained. These letters were sent to schools, including the University, where 80 percent of student loans are handled by one lender. According to Hubbard, the University's inclusion in this indicates only that Bank of America handles much of students' financial business.
"The University did nothing wrong, however, we did receive a letter and it simply asks for a thorough review of our relationship with Bank of America, which is fine," Hubbard said. "We are transparent concerning our relationship with them. In the future we will have three or more preferred lenders on our list. We are committed to getting the best services possible from potential lenders for our students."
Spellings stated in a press release that while the job is not finished, these federal regulations "are a major step forward in improving the transparency of the student loan programs, ensuring borrower choice and restoring confidence in the federal financial aid programs."
While the measures from the Department of Education are a step in the right direction, they do not address sufficiently the problems with private lenders, according to Luke Swarthout, an advocate for the Higher Education Project, a U.S. public interest research group.
"I'm not objecting to the things the Department of Education is doing, but I think they could do more," Swarthout said. "There does not seem to be a significant urgency to address the issues surrounding private student loans, and I think the department should be more aggressive in attacking some of the real issues."
Although there has been a sizable controversy over this issue of preferred student lenders, Hubbard maintained that this controversy can only serve as a benefit to University students and parents who currently hold loans.
"It's good to have this kind of publicity surrounding this issue," Hubbard said, "Financial aid is getting more grant money, and with the University looking for multiple new preferred lenders we can really detail what we're looking for in a lender. This issue has only been beneficial to our students."
The new regulations will go into effect in July, 2008.
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