Getting Schooled on Student Loans
Correction: In an earlier version of this item, I wrote that "Loan to Learn, in fact, has seen its share of the market grow to 18 percent of all student loans and to about 10 percent of all student aid awarded -- a total of $13.8 billion in 2004-2005." Thanks to Mark Kantrowitz of finaid.org, who pointed out that these figures actually refer to all private student loans, not just Loan to Learn. The item has been corrected.
These days, getting angry seems to be part and parcel of earning a degree. And I'm not talking about student protests. I'm talking about student loans.
Higher education has always been expensive and applying for financial aid was never easy. The difference now is that student loan debtors, like other consumers, are more vocal when they think they're being treated unfairly. And student loan companies don't like what they're hearing.
The latest controversy revolves around Loan to Learn, whose parent company EduCap Inc., based in Herndon, pioneered the private student loan business.
A quick and dirty primer: Students have several pools of money to tap into to pay for school: their family, grants and scholarships, federal loans and private loans.
Student borrowers are limited as to the amount of federal loans they can take out. And family and grant money are, for most people, a finite resource. That's where private loans come in.
Private loans have become lucrative as the cost of higher education has risen, to the tune of 18 percent of all student loans and to about 10 percent of all student aid awarded -- a total of $13.8 billion in 2004-2005. Alan Collinge of Student Loan Justice says business is likely to get even better for private lenders in the education industry because Congress took bankruptcy off the table for private loans in the most recent bankruptcy legislation.
Last month, the U.S. Student Association filed a complaint against EduCap with the Federal Trade Commission, saying it misleads students and families about their loan options.
The complaint focuses on "Demystifying Financial Aid", a pamphlet Loan to Learn offers on its Web site. The gist of the complaint is that Loan to Learn makes private loans seem like an appealing alternative to federal loans and misleads borrowers about benefits that only federal loans offer.
Contacted yesterday, Loan to Learn spokesman Tom Calcagni said he is working on a response. As soon as we hear from him, we will post his comments here. The company told the New York Times yesterday that the allegations are "false and contrary to EduCap's philosophy and business practices of 20 years."
Loan to Learn is also facing claims they use gifts and paid trips to conferences to get on the good side of financial aid administrators, who put together lists of "preferred lenders" for student borrowers.
Applying for financial aid is so complicated and independent information so hard to come by, that student borrowers and their families have come to rely on the preferred lender lists and lenders know this, said Luke Swarthout of Student Debt Alert and currently a guest blogger for Generation Debt.
The payola allegations resurfaced yesterday in the New York Times, which reported that EduCap is sponsoring a February 2007 "Education Summit" at a Four Seasons in the Caribbean and has offered all-expenses-paid "special invitations" to university officials and their spouses. School administrators at universities that have accepted money from lenders or who have taken home items such as iPods from lenders, said the money and items they received were of too small a value to influence them.
As a private education lender that does not offer federally-guaranteed loans, Loan to Learn is not subject to the illegal inducements rules, said Mark Kantrowitz of finaid.org.
Kantrowitz says, however, he doubts any school is going to choose to promote a particular lender just because they throw a nice party or give away free iPods. "Most of the financial aid administrators I know are very dedicated, focusing on providing their students with the selection of lenders that best fit their needs," he said.
I suspect many student borrowers might be a tad less angry with lenders if executives at the student loan companies weren't making so much money. Sallie Mae Chairman Al Lord, you might recall, was part of a group that was in the running to buy the Nationals. EduCap chairwoman and co-founder Catherine B. Reynolds tried to donate $38 million to the Smithsonian in 2001, then withdrew it after curators balked at some of the requirements. Her foundation ended up giving $100 million to the Kennedy Center.
According to Kantrowitz, low cost is one factor, but there are also dozens of other criteria, such as customer service and problem resolution.
Are you better off for having taken on student loan debt? Or is the cost of higher ed and the terms and conditions of student loans creating a new type of indentured servitude?
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