Should families who need to borrow money for college rely on their school's preferred list of lenders?

Historically, the vast majority have. But the widening college-loan scandal has raised questions about how lenders get on those lists. Was it because they offered the best deals for students? Or did they offer the best deals to schools and, in some cases, financial aid officers?

Some schools have accepted payments from lenders for placing their names on, at the top of or exclusively on their preferred-lender list for private loans.

Last week, after an investigation by New York Attorney General Andrew Cuomo's office, six schools agreed to return payments they had received for steering students to lenders, including Citibank of New York and Education Finance Partners of San Francisco. The money will be credited to students who had taken out private loans that generated those payments. The average refund will be $500 at the University of Pennsylvania and $60 at New York University.

Later in the week, Cuomo requested information from the University of Southern California, University of Texas and Columbia University about senior financial aid officers who owned stock in the former parent company of Student Loan Xpress. The company is, or was until recently, a preferred lender at all three schools. The three officers have been put on leave pending internal investigations.

On Thursday, it was revealed that Matteo Fontana, a senior official in the U.S. Department of Education, also owned stock in the former parent of Student Loan Xpress. Matteo oversees private-sector lenders that participate in the government's Federal Family Education Loan Program. He was placed on leave Friday.

Although most financial aid officers are dedicated people who do their best for students, these revelations highlight the importance of looking outside your school before choosing a loan.

The best way to borrow money for college is with a government-guaranteed Stafford loan (for undergraduate students), Plus loan (for parents) or Grad Plus loan (for graduate students).

Unless your school participates in the government's direct-lending program, you can choose any qualified private-sector lender for these loans.

For private or alternative loans, which are more expensive because they are not guaranteed, students can choose any lender, no matter what school they attend.

To narrow the options, most schools publish lists of preferred lenders for both government and private loans. They typically feature half a dozen lenders, but they might have only one. Students should always ask if the school is getting any type of payment or service from lenders on the list.

To get a loan, schools must certify that you are qualified. By law, schools can't refuse to certify a loan, nor can they cause "unreasonable delays," because you choose a nonpreferred lender. That said, many schools strongly discourage students from choosing a nonpreferred lender.

On its Web site, Wheaton College in Illinois says, "Parents who borrow from one of our preferred lenders experience fewer problems and delays than those who choose other lenders. The terms of federal PLUS loans are set by the government and there is little variation between lenders.

Because of this, it is very unlikely that a parent would owe less or be better served by borrowing from a local bank rather than one of our larger preferred lenders."

The University of North Carolina at Chapel Hill tells students on a form that if they choose a lender other than the school's sole preferred lender for Stafford loans, "there will be a six-week delay in the processing of your loan application" because it must be processed manually.

No official from either school was available for comment Friday.

Most schools say they recommend lenders based strictly on price and service. Some schools say they can get a special deal from preferred lenders because their alumni have stellar repayment rates. If you run into problems with a loan, you might get better service -- from the lender or your school -- if you use a preferred lender.

Despite the negative publicity, "the financial office in the vast majority of cases should be trusted and relied on as one source" of information, says Kevin Walker, president of Simple Tuition, an online college loan referral service.

But your search shouldn't end there.

A student who graduates with the typical $20,000 in debt and pays it off in 10 years can save about $1,000 on average by shopping around, says Mark Kantrowitz, publisher of FinAid (www.finaid.org).

Comparing college loans is a daunting task.

The government sets the maximum rate and fees on Stafford and Plus loans. The maximum today is 6.8 percent fixed for Stafford and either 7.9 percent or 8.5 percent fixed for Plus loans.

Starting July 1, the maximum up-front fees will be 2.5 percent of the loan amount for Stafford loans and 4 percent for Plus loans.

Many private-sector lenders will discount rates and fees, although the rate discounts usually require students to sign up for direct payments from their checking accounts and to make a minimum number of on-time payments. You can lose the rate discount if you make even one late payment, which is easy to do when you're fresh out of school and moving around.

For this reason, it's often better to choose a fee waiver or discount over a rate discount, unless you plan to pay off your loan immediately or are certain you'll never make a late payment.
Comparing private or alternative loans is vastly more difficult than comparing government-backed loans because the rates and fees vary widely. Virtually all private college loans are variable rate and are tied to different indexes.

Unfortunately, lenders are not required to follow a standard format when they calculate the annual percentage rate on a college loan, as they must with a home mortgage or credit card loan.

As a result, comparing APRs is not a useful tool for college loans.

Kantrowitz says he will introduce a calculator on FinAid in the next few weeks that will let students compare college loans on an apples-to-apples basis.

After checking out your school's preferred lenders, check out offers from competing lenders.

At http://www.simpletuition.com/, you can compare rates and terms from more than 20 lenders. Like most loan sites, it collects a fee from lenders that appear on the site, but it will at least provide a good comparison to your school's preferred lenders.

MyRichUncle is a newer company that provides no-strings-attached discounts on Stafford and Plus loans.

FinAid has an extensive list of lenders, including discounts.

Some states provide low-cost loan options for state residents no matter where they go to school and for out-of-state residents attending an in-state school, public or private.

If you have just received your financial aid package for next year, do not feel pressured to choose a lender now. "Most schools don't start certifying loan applications until June or July," says Kalman Chany, president of Campus Consultants.

You can submit a loan application at any time during the school year.

What families should be focusing on now is how much debt they should take on.

Over four years of college, dependent undergraduates can take out up to roughly $19,000 in Stafford loans and their payments will be roughly $200-plus a month, Chany says.

For most students, that's reasonable, he says. If their parents are not willing to help out, students should think long and hard before going into additional debt.

"If they were thinking about taking out private loans to go to school, I would say you should think seriously about going to a cheaper school" or a school that provides more financial aid, Chany says.

Kantrowitz offers this rule of thumb: "If you are borrowing more than your starting salary, you will find it difficult to make the payments."

Once you have determined how much you can borrow, shop around for the best loan.

"It's like anything else. The more cars you buy, the more dealers you visit, the more likely you are going to make a good deal," says Paul Wrubel, co-founder of TuitionCoach. "Use all the tools at hand. Keep your ear to the pavement, ask the colleges what their preferred lenders are, check them out. Ask them point blank, is there any kind of rebate to the colleges for recommending you?"

To learn more about preferred lender lists, see www.finaid.org/educators/illegalinducements.phtml.