Colleges Keep Pushing Certain Lenders
Nonprofits that could save students plenty in loan costs are still often not promoted on schools' lists
As college students and parents scramble to line up educational loans in the last frantic weeks before classes start, many schools are still sending out lists of "preferred lenders" that steer borrowers to unnecessarily expensive loans.
Four months ago, most major lenders agreed to stop making payments to either schools or financial aid officers to win placement on the influential lists. In addition, many schools have agreed to codes of conduct that are supposed to open up the lists to lenders that offer the best deals.
U.S. News found, however, that the lowest-cost lenders are still omitted from many colleges' lists. That means many borrowers don't realize they could save hundreds and, in some cases, thousands of dollars by borrowing from a lender not recommended by the school.
Many of the low-cost lenders, for example, will waive the 2.5 percent upfront origination and default fees typically charged students who borrow through the federal Stafford program. That saves students up to $237.50.
And many low-cost lenders are also offering to knock as much as 2.25 percentage points off the federally mandated 6.8 percent ceiling on Stafford loans.
Those numbers may sound small, but they quickly add up to significant savings. For a student who takes out $19,000 in federal Stafford loans—the typical level of debt for college graduates who borrow—reducing the interest rate of a 10-year Stafford loan by just 1 percentage point saves more than $1,000 over the life of the loan. The savings for parents borrowing through the federal PLUS program could be even greater, since they often borrow more. Here are some tips on finding the best educational loan deals.
Stephen Clinton, president of the Indiana Secondary Market for Education Loans, said his nonprofit is still shut out of many lists even though it offers loans with total costs lower than many of those on college lists. ISM offers student Stafford loans in which the origination fee is waived upfront, and graduates who agree to automatic electronic payments pay only 5.8 percent in interest. "It makes me crazy," Clinton says, because ISM doesn't require borrowers to jump through many hoops to get its discounts. Many other lenders advertise attractive-sounding discounts but attach so many conditions that only a tiny percentage of borrowers actually get the promised goodies, he says.
In addition to omitting his lender from the list, some schools discourage the students who do manage to find ISM's discounted loans, Clinton says. Federal law requires schools to accept loans from accredited lenders, but some schools "push [the ISM loan paperwork] to the back of the pile. And the student gets tired of waiting" for money needed to pay tuition bills.
In the end, Clinton says, many students switch to a preferred lender because the loan will go through faster. He declined to name schools that continue to put barriers up against ISM loans because "if you go at the financial aid community, they hold it against you."
Other low-cost lenders missing from many schools' lists are:
MOHELA, a nonprofit based in Missouri that waives fees and cuts at least 2 percentage points off federal student loans for college students who sign up for electronic payment.