Surviving student loan scandal

Marketplace Staff Apr 20, 2007

Surviving student loan scandal

Marketplace Staff Apr 20, 2007

TESS VIGELAND: If you borrowed money for college, there’s a decent chance you owe money to Sallie Mae. It’s the country’s biggest student lender.
Sallie Mae directly or indirectly funds about 40 percent of private student loans in this country.

This week, some private equity funds bought the company for $25 billion.
The deal comes at a troubled time in the industry. Sallie Mae and other lenders have been accused of some unsavory ties with college financial aid So we asked Marketplace’s Amy Scott to look into what it all means.

AMY SCOTT: Next month, Chelsea Hamilton will graduate from Columbia University with advanced degrees in law and business. So she’s no slouch in the brains department.

But Hamilton needed about a quarter of a million dollars in loans to pay for her education. And she admits she could have been a bit smarter about finding it.

CHELSEA HAMILTON: I had never taken out student loans before, and I had no idea what I was doing. So.

Like many schools, Columbia keeps a list of preferred lenders on its website. Hamilton says there was so much information, and so little time to sort through it, she just went with the first lender on the list.

HAMILTON: Given recent scandals, it seems like less of a good idea.

She’s referring to an investigation by New York Attorney General Andrew Cuomo. His office has uncovered some questionable ties between college financial aid offices and the lenders they recommend. Sallie Mae and Citibank settled for $2 million each — though they didn’t admit to any wrongdoing. Cuomo’s office estimates 90 percent of students go with a preferred lender.

Columbia sophomore Gareth Schumacker is no exception.

GARETH SCHUMACKER: I kind of scanned them and figured oh, it probably doesn’t make a big difference. But I’ll find out when the bill starts coming, I guess.

The thing is, he may be right.

Luke Swarthout is a student advocate with the consumer group U.S. PIRG. He says when it comes to student benefits, lenders offer pretty similar packages. Partly because they market not to students, but to schools.

LUKE SWARTHOUT: Whether those incentives are, you know, additional grant aid for students, contributions to the library, or in the case of the recent scandals, individual payoffs to financial aid administrators, those all have the effect of preventing a more robust market of loans. If we had a real robust student loan market with real competition, students would be paying less for their loans than they are now.

There are some things students and their parents can do. Find someone in your school’s financial aid office that you trust and explore all your options. Take a hard look at that cheaper state school. Some families might take out a home-equity loan to help pay for college. It might offer a lower interest rate than a private student loan.

Most importantly, Swarthout says, have a serious conversation about how much debt you can really afford to take on.

SWARTHOUT: The first instinct should not be to take out as much as you can in loans. They may want to look at other school options out there, other ways of paying for college. So I think there is a role for, you know, personal responsibility in this.

Lawmakers are pushing for more transparency in the lending industry. As part of settlements with the New York Attorney General, several schools have agreed to a new code of conduct. It prevents them from accepting payment for a spot on the preferred lender list. It also bans financial aid officers from accepting trips or paid advisory positions from lenders. Some members of Congress are pushing for similar reforms nationwide.

In New York, I’m Amy Scott for Marketplace Money.

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