College untouched by lending scandal

Author: Zamir Ahmed

Middlebury College was not among the nation's 400 colleges that received a letter from New York State Attorney General Andrew Cuomo cautioning school officials about a potential conflict of interest with student loan lenders, according to financial aid officials at the College. A spokeswoman at the New York State Attorney General's office could not confirm or deny whether the College received a letter because the letters were sent confidentially.

"This [preferred lender scandal] casts a black eye on the profession but we can say that we are not part of this," said Patrick Norton, associate vice president for Finance and controller. "We have not been contacted by the New York State Attorney General or the Department of Education. We may be, but if we are, we can say we're clean."

The College does have a preferred lending contract with Nelnet, Inc., one of six student lenders that was initially asked to submit information regarding lending practices during Cuomo's investigation, according to information on the New York State Attorney General's Web site. The company is still currently under investigation by Cuomo for its lending practices, although not for its relationship with the College.

In a voluntary agreement with Nebraska Attorney General Jon Bruning signed on April 20, the Nebraska-based Nelnet pledged to adopt a code of conduct governing its relationship with college financial aid offices and said it would post a review of the company's business practices on its web site, according to a press release from the company. In addition, Nelnet, which has over $23 billion in net student loan assets, agreed to commit $1 million for a national program to educate families about how to pay for college.

The College switched to Nelnet, which is known officially as the National Education Loan Network, as its preferred lender of choice for alternative loans in January of 2006. Alternative loans are loans that are not guaranteed by the federal government and do not include Stafford loans. The College chose to leave the federal direct lending program because greater borrower benefits were available in the private lending industry. The benefits range from better customer service to a lower interest rate over time, according to financial aid officials.

"The overarching reason was borrower benefits," said Norton. "There are borrower benefits that students receive from a private lender that they don't get from the federal government's direct lending program. At the end of the day, it was 'how do you reduce the debt burden to the student.' It was that simple."

In a press conference on March 15, Cuomo revealed that his investigation into the $85 billion-per-year student loan industry had uncovered numerous conflicts of interest throughout the industry, which benefited colleges at the expense of students and parents. These conflicts of interest included such practices as revenue sharing with colleges, all-expense paid trips for financial aid officers and call centers for schools that were staffed by employees of private lenders. According to Norton, the College does not engage in these practices and has not been implicated in any wrongdoing.

During its hunt for a preferred lender, the College looked at the programs and benefits offered by six private companies before deciding on Nelnet as the lender that best suited the College and its students.

"We had completed a very comprehensive analysis," said Director of Student Financial Services Kim Downs, whose office manages over $30 million in aid per year. "We really wanted to look at everything that these individual lenders could provide to students. Every decision we made was in the student's best interest and for the student. There was nothing received on our end. "

The focus of Cuomo's investigation into the student loan industry - an investigation that at least six other state attorneys general have joined - is colleges' preferred lenders lists. Although some colleges maintain a preferred lenders list with only one lender listed, any list is voluntary and students are free to borrow from other lenders. However, according to a number of news sources, 90 percent of students rely on preferred lender lists when picking a lender. According to financial aid officials at the College, Middlebury's preferred lender list is only meant to serve as a guide for students, and students remain free to select lenders not on the College's list.

"As a service to students and families we put on this [preferred lender] list the lenders we believed to provide the best borrower benefits," said Norton. "With that said, it is not mandatory that students use the College-listed preferred lenders - they can select any lender for alternative loans."

The College's decision to leave the federal direct lending program was part of a nationwide trend toward using private lenders for student loans. Currently, only two of the 20 top-tier colleges in the United States remain in the federal direct lending program. Congress has undertaken steps in recent years to draw colleges back to the program, and has proposed cutting interest rates for federal loans in half or rewarding colleges that steer students to federal loans. Amendments to federal programs, however, would not necessarily mean a better deal for students."

"I can tell you that if the feds are dropping [interest rates] in half, the private lenders are going to respond in kind," said Downs. "The borrower incentives offered by the private lenders will likely be more attractive; however, our office will evaluate all borrower benefits on an annual basis, including those offered by the direct lending program."

Still, the College would not rule out reenlisting in the direct lending program if students would benefit from such a change.

"If the direct lending program run by the federal government creates a more competitive product for students and families, then the College would certainly explore a return to direct lending," said Norton.