Endless Rise in College Tuition May Be Instigated by College-Lender Relationship

A recent government inquiry into the “relationships” forged between college financial aid offices and student loan lenders has raised the question, “Is there a correlation between soaring college tuitions and fat-cat lenders?”

The recent New York Times article (“Greater Scrutiny on Colleges and Ties to Lenders,” Glazer) draws attention to the initial inquest, which originated with the New York Attorney General’s Office. As we speak, the Attorney General is sniffing out a slew of college practices to see exactly what stinks.

See, colleges and universities prefer to work exclusively with a particular set of lenders, that’s no secret. And the qualifying criteria for such a relationship? That’s what a growing number of lawmakers want to know.

Back Office Handshakes or Just Good Business?

It’s a matter of course that “lenders use various tactics to curry favor with colleges and universities.” But until now the practice has gone without issue. Unchecked tuition rates in conflict with government efforts to curtail student loan rates, now makes this professional partnership a rug to be looked under. Senator Ted Kennedy (Mass.) has likewise waxed skeptical over the harmlessness of the “preferred lender lists” that many colleges maintain:

“Mr. Kennedy is pushing a bill that would require the disclosure of such arrangements; ban gifts and services worth more than $10 to college employees; and require lenders to tell students that they might be eligible for low-interest federal loans.” (NY Times)

Currently the de rigueur business agreement between lenders and colleges looks a bit like this:

“The kinds of arrangements loan companies may have with colleges vary. One type is the kind that Education Finance Partners has — paying a college increasing sums of money based on loan activity. Other lenders, including Sallie Mae, make money available to an institution for loans to students with poor credit, also based in part on private loan volume.”

Private loans might be the operative term here. Most lenders of course provide the whole menu of federal loans, but they also make a bigger business with their private, or alternative student loans. According to the NYT, private student loans now account for 20 percent of all student loans put together, and they “have grown at an average rate of 27 percent annually since 2001.”

Potential Plot Twists

Players on all sides of the fence have predictions for bettors. Student loans could become a guerrilla marketing mess if lenders are left to appeal directly to college students, or colleges are unable to recommend lenders; student loans could go up, especially for students with bad credit and/or low income levels; or the relationship could be guaranteed fair and just—preferred lenders but based not on back office kickbacks relative to volumes of customers served, but instead on the best rates and service, buoyed up by the college’s forthright reputation.

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