Tuesday, October 24, 2006

Lender Kickbacks and Caribbean Vacations

Two articles today, one in the NY Times and one in InsideHigherEd describe the extravagant Caribbean conference of the private loan company Loan to Learn. The New America Foundation helped break the story on their website yesterday. The company invites financial aid administrators and "a guest" for an all expense paid trip to Nevis. An estimate of the travel and accommodations costed the junket out at $3000 per person. While neither the agenda or list of invited guests are public, but this looks to all the world like an attempt to buy access into college financial aid offices.

Loan to Learn is making news for the second time in a month. In late September the United States Student Association filed a complaint with the Federal Trade Commission arguing that the company misleads students on its website. Loan to Learn, unlike other private lenders, only offers private or "alternative" loans rather than federally guaranteed loans. As such the company has encouraged students to skip the complicated federal process and just apply for private loans that are on average far more expensive than federal loans.

The background on this issue is that financial aid administrators act as gate keepers between private lenders and students. Administrators have for decades vetted potential lenders and created "preferred lender lists" as a guide for students who are trying to pick a lender from amongst hundreds of similar options. Students are, as you can imagine, very reliant on the preferred lender list, meaning placement on that list (and even the order you appear on the list) can mean more or less borrowers. In this system a good relationship with an administrator can mean millions of dollars for a lender.

Financial aid administrators compose their preferred lender lists entirely out of view of the public. It is a private decision with large public consequences for the students attending that school. While it is virtually impossible to know whether any particular vacation or gift influences the administrators choice of lenders, it is equally impossible to disprove the influence or to ameliorate the concerns of onlookers. The only acceptable way to deal with this issue is to ban vacations, trips, fancy dinners. Some administrators will lament this-arguing that they work hard for students and if in the process they can benefit a little from the corporate largesse who really gets hurt? The answer is American higher education is hurt when the same people who compose financial aid packages are tied up with seedy sales efforts. Administrators are invited on these trips because they coincidentally stand between lenders and potential profit. We should not confuse this coincidence with entitlement to such luxuries.

The apt analogy to the administrator/lender relationship is the politician/corporate interest (contributor). Administrators like politicians have tremendous power that lenders hope to influence for their own financial benefit. It is impossible to know exactly whether a Caribbean vacation will result in Loan to Learn being added to any particular lender list, just like there's now way to know for sure that Jack Abramoff flying politicians to Ireland for golf outings influenced their particular votes. That's why we should set a higher standard for administrators and politicians alike-no expensive vacations, trips, fancy dinners.

Financial aid administrators will be outraged by the inference that a trip would influence their decision to list Loan to Learn or any other particular lender. They must accept that to all the world such a trip looks like an bribe or a kickback. Loan to Learn's Nevis vacation is the most extravagant such trip to get publicity but there are a myriad of smaller trips, dinners, meetings that loan companies run around the country for school officials. While we are discussing an exceptional occurrence, influence peddling is a systematic problem with serious consequences for students and the perception of American higher education.


Anonymous said...

The author offers a generally thoughtful and well-reasoned view, but I do take exception to two points in the final paragraph:

--"Financial aid administrators will be outraged by the inference..."

I think that's a straw-man argument. My guess is that while some FAAs are perhaps defensive, ashamed or embarrassed by the trips, etc., I don't think that many will be "outraged," as you say. They're a more thoughtful bunch.

Finally, the "myriad of smaller trips, dinners, meetings" to market products happens in every industry, not just higher ed. I'm not excusing a quid pro quo, but consumers and taxpayers all the time get less than top value because of cronyism, favortism, nepotism, tee times, etc.

I don't think it's fair or helpful to demonize the financial aid community over this.

100Student said...


I recently published an article on the dangers and benefits of student loans and other forms of college financial aid – here is a quote from it, in case you are interested:
Student loans repayment can be a real nightmare without adopting some strategies that would help the new graduates to organize their social and financial life. Here are some strategies they can use to do this:
- An additional part-time job;
- Freelancing is another option (meaning that they can do particular pieces of work for different organisations, without working all the time for a single organisation);
- They should try to keep their living expenses as low as possible (live in a smaller apartment, live with a roommate to share some of the expenses, find an apartment that is closer to the job, to eliminate the extra-expenses for transport etc.);
- To apply for forbearance (this is an immediate solution for hard times when the new graduate is in impossibility to re-pay the amount of money and the need for student loan consolidation becomes apparent; it is a temporary period, when the graduate can postpone or delay his or her re-payments until a later time on a federal or direct loan after the beginning of the re-payment, and when the student doesn’t qualify for deferral). The forbearance must be applied through the lenders of the loans.
- To consolidate the payments.
If you feel this helps, please drop by my website for additional information, such as federal student loans information or additional resources on private student loans .



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Gb said...

nice though, Come May the prices drop dramatically as already discussed, and one of the main reasons for this is the beginning of the tourist season in Europe, and the southern United States. It isn’t as you might have thought because of the onset of the hurricane season, which is later on in July and August.

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