Colleges break links with lenders but now give less guidance
By Kimberly Palmer September 7, 2007

After months of scandals, investigations, and legislation that could revolutionize the student loan industry, students and parents are sorting through the wreckage—and finding the loan process more confusing than ever.

In the wake of revelations that some schools had revenue-sharing agreements with lenders and a handful of financial aid officers held stock in the companies they were recommending, some schools have dropped their "preferred lender" lists altogether, at least temporarily. Johns Hopkins now advises students to type "student loans" into a Web search to find lenders. The University of Texas-Austin is temporarily listing the lenders with the most local volume on its website; it expects to provide students with a vetted list of lenders in the spring. Texas is also considering randomly rotating the order of the list to ensure fairness.

Other schools, including the University of Michigan and the University of Wisconsin-Madison, have long done without preferred-lender lists and are emphasizing their neutrality. "If there was ever any tendency to advise people [on specific lenders], we're making sure that's not happening," says Susan Fischer, director of financial aid at Wisconsin.

Less information. That means students and parents are left to navigate the murky loan world largely on their own. "Parents and students may find they aren't getting as much information as they would like because colleges are in the process of figuring out what is ok to say and what is not," says Robert Shireman, executive director of the Project on Student Debt.

Michelle Black, a corporate real-estate analyst in Sugar Land, Texas, received little guidance after her daughter, Korrina Sanchez, was accepted by Sam Houston State University earlier this year. Because the school didn't provide any specific suggestions, she turned to the loan advertisements she received in the mail. She ended up choosing her lender based on the knowledge and helpfulness of the loan company customer service representative who answered her call.

Mario Fields, a freshman at Morehouse College in Atlanta, was also left to feel his way through the process. "I didn't know how to shop for it," he says. "All [the financial aid office] told me was I was on my own picking the lenders and I had to run the figures myself." Fields tried to manually compute the various rebates the lenders offered and selected one that offered 3 percent off the loan's principal upfront.

Parents and students are increasingly turning to online comparison websites, which allow users to search through lender benefits and rates. Kevin Walker, president and cofounder of for-profit SimpleTuition, a comparison site, says that according to internal research, the phrase "compare student loans" was searched for on the Internet a few dozen times a day in the summer of 2006, while this year it has been typed into search engines several hundred times a day. "Students and parents," he says, "have definitely heard the message that they should shop around."

In response to the popularity of sites like his, many lenders are upping their benefits, such as interest rate reductions for on-time payments and reductions in fees, to stay competitive. Two years ago, Walker says, lenders often offered an interest rate reduction after 36 or 48 months of on-time payments. Today, they usually make borrowers wait only 12 or 24 months before receiving the reduction. Signing up for automatic monthly payments used to garner a quarter-percentage-point interest rate reduction; now the going discount is closer to half a point.

Lenders warn that those increased benefits may be short-lived. They say the College Cost Reduction and Access Act, which is expected to soon reach President Bush's desk, would cut lender subsidies to such a degree that they would be forced to cut back on benefits to borrowers. An August statement signed by about 50 lenders, including Sallie Mae and JPMorgan Chase, said the legislation would make college less affordable because it would force lenders to reduce discounts on interest rates and upfront fees. A related bill, the Student Loan Sunshine Act, which is also pending, would ban gifts and other potential conflicts of interest.