Sorting Out the Press on the College/Lender Scandal

Over the thirty years that I have been doling out advice and information about college, I continue to discover a great deal of misinformation on a topic that is so widely discussed and covered by an abundance of resources including, handbooks, web based sites and search engines, guidance materials and professional advisement services. How can college admissions and financial aid continue to be so confusing to so many people in spite of this excess of information? On top of this is my growing concern that higher education has become a political football that can be championed by any candidate looking to forward their particular agenda in an electoral campaign. Anyone who has been following the news recently is probably aware of the debate on educational reform in higher education as well as investigations into the lending industry and illegal or unethical practices of revenue sharing between colleges and lenders. The timing of such allegations unfortunately creates confusion and distrust because this is the time when most families are faced with making critical decisions about college and financial aid. (May 1)

How does a family figure out whether or not they are making the right choice for their teen, when grave suspicion and mistrust have been heaped onto both college financial aid offices and college lenders? How does one determine who the good guys are, what information is misleading and how to tell the difference? In the past, most families relied upon the information provided in financial aid award letters to guide decision making. Now, recent allegations suggest that this information may be influenced more by financial arrangements that benefit the school, rather than being in the best interests of student. The accusations are that certain schools and lenders engaged in practices whereby, the school benefited financially by steering students to a particular lender for loans. In addition, students were often prohibited from using their lender of choice, although the federal law states that students do not have to obtain their loan from the college or a specific preferred lender. The fact that this is happening at any college robs students of their ability to exercise their choice in selecting a lender.

Clearly, these are practices that cannot be allowed to continue, being unfair not only to students but to the many companies in this competitive business that do not engage in such practices. Competition ensures that rates remain low and companies compete to offer the individual borrower the best benefits. When collusion occurs between a particular school and lender, this doesn’t happen. While I applaud the crusade to go after the offending institutions, my bigger concern is for a seemingly blanket indictment of the loan industry and the long term ramifications for creating a system of distrust and confusion for the public. In addition, the public debate over the mounting debt obligations that burden young college graduates should not be attributed to college lenders. The fact that this industry has grown and recognized such profits is due to an increased demand for loans by the public. To suggest otherwise, is not only erroneous, but oversimplifies the more pressing issue of the rising cost of college tuition.

In the thirty years since I graduated from college, three major changes have occurred. First, and most obvious, is the growth in the number of students applying to college. Higher percentages of high school graduates are applying to and attending college. This increase is not only among traditional high school graduates, but is also demonstrated in the increasing number of adults starting or returning to school. Second, the competition for colleges, especially at the selective and highly selective level, has gone through the roof. In a report by Bloomberg (2007), the acceptance rate at highly selective schools, such as Princeton and Harvard, are at an all time high. Princeton admitted a little less than 10% of its applicants this year. This is a trend seen not only at highly selective schools, but at other popular universities as well. Third, the costs of college education for both public and private schools have grown at an alarming pace, with tuition at public institutions out pacing the costs at many private colleges. This third trend, an increase in tuition, directly affects the growth in college lending which has traditionally served to bridge the gap between family resources and scholarships and grants.

As a first generation student entering college back in 1973, I know first hand the types of tough choices families have to make to send their kids to college. I was brought up to believe that education was the big equalizer: The way a person could improve their chances and opportunity to make a better life for one self. My parents, both hard working high school drop outs who dreamed of sending their children to college, got their wish when I was accepted to a variety of colleges including an Ivy League college. Paying for bills month to month, there was no opportunity for them to save money for college. Paying the mortgage was our family’s first priority. Luckily, I received financial aid. A generous financial aid package offered me half of the monies needed to pay for tuition, room and board. An NDSL, the forerunner of the current federal loans, parent contributions, earnings from work and college work study, enabled me to attend my first choice. Although I had to work during those 4 years, unlike many of my more wealthy classmates, and accumulate a total of 8,000 dollars in debt, I never regretted my choice. Now fast forward to the present. Tuition at that school is in the mid 40,000’s and a family facing that same decision may be asked to contribute a good deal of that amount. While tuition has sky rocketed, the maximum federal loan available is approximately 3,500 dollars a year. Many families trying to meet the cost of education will take loans to pay the balance. In addition to Stafford loans, they may finance the rest using Plus loans, private/alternative loans or home equity loans. By the time a student graduates with a bachelor’s degree, they may have loans totaling $15,000+. For those students going on to graduate school, the amount of debt just keeps growing.

It seems to me that the problem is more complex than playing “Blame the Lender”. I say this not because I feel that the loan industry needs defense, but because I worry that by focusing on loans, we do not address the real problem that plagues the industry: Rising tuition costs. We know that tuition rates have increased as colleges and universities struggle to meet the growing demands of salaries and benefits, increasing enrollment, a demand for additional labs and lecture halls, the updating of technology and services and the general maintenance, up keep and expansion of college facilities. While many colleges have been successful at raising money to fund expansion of college services and to fund scholarships, public schools and smaller, less well endowed schools struggle to survive. Those students seeking a college education must compete for fewer seats in a more highly contested competition for admission to select schools and for desired scholarships. And the net result is that many students find themselves with inadequate funding to pay for college. The same opportunity that I worked for back in 1973 may be fast becoming an unattainable goal for a student coming from a background similar to my own. The opportunity to attend a highly selective private school may be far beyond their reach. The solution to this issue will not be easily fixed by any one politician’s agenda.

As a parent, I too am concerned with the growing indebtedness of today’s youth, inadequately prepared to take on the responsibility for repaying that debt. I am aware that many students will ultimately default on these loans, contributing to a higher cohort default rate that burdens schools, students and taxpayers. I am concerned that many jobs that our students aspire to compete for may not be available for them upon graduation due to increased competition and outsourcing trends. I worry that parents in response, will turn to debt solutions that contribute to their own financial insecurity at a time when they need to be saving for their own retirement. And I am truly concerned that the emerging population of lower class and immigrant groups will not be able to afford college and will be relegated to taking jobs at the unskilled level instead of moving up the ladder as our parents did. This is not the future I dreamt of for me or for my children.

When I started writing this column, I promised myself that this would be a place where I could engage in plain talk about college admissions. So let’s do just that.

It would be nice to be able to blame the loan industry for the problem, but that is not a true analysis of the problem. What does contribute to this problem is the confusion and lack of information many people have about college loans. The average 18 year old signing up for a loan as part of their financial aid package has not really thought out what this responsibility entails. Because most students rely on the college which includes a loan in the financial aid package, there is a trust assumed that the school is acting in the student’s best interest. The message here is that the public cannot afford to leave these decisions to others. If we learn anything from this, it is that students and their parents need to educate themselves about financial aid options and start planning for college earlier. It is my hope that when the dust clears, after all the investigations have been completed, that the system will not only have rid itself of revenue sharing schemes, but that the public will be able to trust in the system. It would be a shame if these investigations caused a panic and distrust that keeps families from seeking out the assistance they need to pay for college.

The same way that my family needed loans to help pay for my college 34 years ago, the average American family finds them in the same situation. I would hate to see a return to those times when only the very wealthy could afford to go to college.

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Points To Take Away From This:

We need to educate ourselves about all of our financial aid options, including different loan programs and current rates.

• Shop around: use independent resources like simpletuition.com to compare rates.
• Start saving and planning in advance.
• Have that parent/child discussion about finances.
• Teach your teen how to live on a budget.
• Don’t borrow more than you need.
• Start looking for scholarships early.
• And, pay attention to deadlines, file early.