Amid 'Preferred' Lists Scandal, Services Sprout Up to HelpBorrowers Shop for Financing, but They Face Scrutiny, Too
By ANNE MARIE CHAKERJuly 19, 2007; Page D1
Amid controversy about how colleges steer borrowers toward certain lenders for student loans, a slew of Web-based services have popped up in recent weeks to help people shop for college financing -- and already, they, too, are drawing official scrutiny.
These new services, with names like Studentloanscout.com and Collegeloanmarket.com, arose partly in response to scandal surrounding colleges' "preferred-lender lists," which are names of suggested lenders that schools give to students to go to for loans. A widely publicized investigation by New York Attorney General Andrew Cuomo has found that some lenders provided perks such as stock or fancy meals to college financial-aid officers in order to be featured on such lists.
But some of the new sites, too, are under investigation by Mr. Cuomo's office, according to people familiar with the probes. These people decline to say which companies are being scrutinized. But they say concerns include lack of disclosure that the sites may have a financial interest in the recommendations they make; the accuracy of the interest rates posted; the impact on students' credit scores; and marketing practices in general.
The new Web sites say they aim to help the borrowers who want to shop for loans on their own, without relying just on input from the schools. Each works slightly differently. But they all say they aim to help consumers compare interest rates and terms for private student loans -- the fastest-growing segment of the student-loan industry. The sites don't charge borrowers, but generally make money off fees that either lenders or schools pay.
More families have had to turn to private loans in recent years to finance college educations. Subsidized federal-loan programs limit what students can borrow, and, increasingly, that amount isn't enough to meet students' needs as colleges raise costs far ahead of the inflation rate. This past school year, the average total tuition and fees at private colleges rose to $22,218 -- 5.9% more than the previous year. Add room and board, and the cost climbs to $30,367.
Private-loan volume now totals $17.3 billion. That is more than three times the amount borrowed in 2000, after adjusting for inflation. The upshot: A college funding stream that was fairly exotic just a decade ago now amounts to about a quarter of the entire federal student-loan volume.
However, borrowers shopping for private student loans find it is almost impossible to accurately assess the cost up-front, since lenders try to conceal their interest-rate formulas on the grounds that it is proprietary information. Often, students have to actually apply for the loan to get a sense of what interest rate they'll have to pay.
Among the sites to help borrowers compare loans, new auction-style models are emerging that aim to present real offers from lenders. Studentloanscout.com, the Internet portal of San Diego-based College Advance LLC, plans to officially launch next month. Consumers will share personal information -- including Social Security number, mother's maiden name and the school they attend -- which goes to the lenders, which also run a credit check. Then lenders would submit pricing offers through a password-protected page that students can check over several days.
Risk to Credit Scores
But this model poses a risk to borrowers because multiple lenders running credit checks could potentially lower a consumer's credit score. Fair Isaac Corp. -- which created the FICO scoring system that creditors use to assess consumers' risk -- says it can make accommodations for other types of loans, notably car loans and home mortgages. Consumers shop around for those loans, and Fair Isaac has been able to take that into account in its credit-risk-assessment formula.
But since shopping for a private student loan has been far less typical, the company has no such accommodation for student loans, says Craig Watts, a spokesman for Fair Isaac. He says the company will look at the phenomenon and consider adjusting the model.
"We think it will happen," says Ulrika Myggen, chief executive of San Diego-based College Advance. Until it does, she says the site offers a disclosure note in the step just before students submit their application, warning that lenders may request credit reports "and that these requests could negatively affect your credit score."
She says she hasn't heard from Mr. Cuomo's office.
Other companies say they have a way around the credit-scoring issue. College Loan Market LLC says its site acts as a gatekeeper for consumers, passing on information to the lenders -- such as the credit scores of the student and co-signer -- while keeping the borrower's identity secret, so that the credit scores are minimally affected.
CEO Marc Stein says five lenders but no schools yet have signed up for his service --
Collegeloanmarket.com -- which launched just last week. He says he hasn't received an inquiry from Mr. Cuomo's office, adding that he believes his product is in the "consumer's best interest."
In general, the lenders that are listed agree to pay the sites a referral fee in exchange for business, meaning that consumers may never learn of lower-cost competitors that don't pay.
And at least one is owned by one of the lenders it lists.
EStudentLoan.com, which is owned by lender Goal Financial LLC, says 12 lenders agree to pay fees in exchange for being listed on the site. A recent search on eStudentLoan.com for a $25,000 private loan yielded two results: One pitched a loan with an interest rate ranging from 8.88% to 14.5% from Campus Door Inc., a unit of Lehman Brothers Inc. Another offered loans at interest rates between 9.34% and 18.72% from Goal Financial.
EStudentLoan doesn't disclose anywhere on the site that it gets referral fees. Shawn Lindstrom, director of e-commerce for Goal Financial and a co-founder of the Web site, says he thinks it should be "pretty obvious" to consumers. Mr. Lindstrom says he hasn't heard from Mr. Cuomo's office.
Another company, SimpleTuition Inc., also features paying lenders on its site. Simpletuition.com lists a total of 65 lenders; some 40 "partner" lenders, such as Key Bank and Bank of America, pay a referral fee to SimpleTuition each time consumers click to them or ultimately choose them. To drive shoppers to those banks, the site gives them favorable placement atop a borrower's search results.
Referral Fees
In April, the company decided to also include nonpartner lenders in the mix -- including Chase and U.S. Bank -- to broaden the results. Those companies are listed in smaller typeface and don't include links to their Web sites. Simpletuition.com states on the site that it "may receive" a referral fee when a student selects one of its partner lenders.
The site doesn't provide specific rates offered by lenders, but rather says the rate would be "as low as" a certain amount. If you click through links to seek more detail on the lender, you can get the "up to" figure.
Kevin Walker, chief executive of SimpleTuition, says the service doesn't purport to be a comprehensive search of loan options. "Internally, we say we want to be part of a nutritious breakfast," he says. He adds that he doesn't believe his company is being investigated. "Using our site doesn't impact the credit rating," he says.
