Eliminating Conflicts of Interest in the Financial Aid Office
THE QUESTIONABLE AC-tions of a few financial aid directors and a lack of clear guidance on private student loans sparked a political and media firestorm that associate all financial aid professionals with the questionable practices of less than 0.1 percent of the profession.
As the dust settles on what politicians and the media have dubbed the "student loan scandal," financial aid officials are left with the challenge of disassociating their offices from any questionable practices and ensuring that their practices are above reproach. Central to tackling this challenge is eliminating all real or perceived conflicts of interest in the office and among its employees.
It can be tricky to eliminate conflicts of interest without eliminating the relationships and collaborations with student loan companies and guaranty agencies that result in many benefits for student borrowers.
To help financial aid offices walk this tightrope, the National Association of Student Financial Aid Administrators (NASFAA) created the Code of Conduct for Institutional Financial Aid Professionals to enhance and clarify NASFAA's existing Statement of Ethical Principles.
"The code allows financial aid professionals to stand tall," said Sheldon Steinbach, senior counsel at Dow Lohnes PLLC, NASFAA's legal counsel. "Having a code you can point to is essential because it reassures the press, and the concerns of students and parents."
Steinbach and Michael Goldstein, also of Dow Lohnes, explained the code of conduct to a packed room of financial aid administrators at NASFAA's annual conference held in Washington, D.C., in July.
-Sheldon Steinbach, Dow Lohnes
"If the Statement of Ethical Principles is the Ten Commandments, then the code of conduct is the books of the Bible," said Goldstein.
NASFAA's Statement of Ethical Principles states that financial aid professionals should "commit to the highest level of ethical behavior and refrain from conflict of interest or the perception thereof."
"Many look at this and say that it is enough. It is a pretty clear statement," Goldstein said.
However, as financial aid professionals are asked to perform more complex tasks and perform more roles, the statement can become less clear. Thus, the NASFAA Board of Directors wanted to provide more guidance.
"The key here is transparency," Goldstein said. "Many times the issue is not the reality of conflict. We are dealing with the perception of conflict of interests, the belief there is conflict. Transparency allows people to see that there is no bias, there is nothing happening under the table that colors the actions. There is an assumption that every preferred lender list is somehow based on some sort of relationship between lenders and the financial aid office. We know what the reality is, but we have to deal with the perception."
Refrain from any action for personal benefit.
Goldstein noted that performing duties in an exemplary fashion would result in personal benefit through recognition and personal advancement, but this provision obviously relates to actions that are contrary to the obligations the individual has to the institution and its students and their parents.
This means that financial aid professionals, or any member of their family, should never accept any form of inappropriate remuneration from any business entity involved in any aspect of student financial aid. It also relates to a course of action that supports the financial aid professional's work but is taken instead of alternative courses of action because the chosen course also benefits the financial aid professional.
Refrain from actions believed to be contrary to law, regulation, or the best interests of the students and parents. Financial aid professionals should understand and adhere to all institutional policies in addition to other local, state, or federal requirements.
Goldstein stressed the use of the term "believed to be contrary to law [or] regulation." Because financial aid professionals work in a complex legal environment, any suspicion that a course of conduct is legally improper should be resolved by referring the matter to the institution's legal advisors.
Ensure information provided is accurate, unbiased, and does not reflect any preference arising from actual or potential personal gain.
Students and parents should be able to fully understand their rights, obligations, and-of paramount importance-their alternatives. Goldstein said that it is important to create the appearance of objectivity as well as actual objectivity. To that end, financial aid professionals should:
- Ensure that borrowers know they don't have to use any lenders on a "preferred lender" list, are free to select any lender, and understand the lender selection and application process.
- Promptly certify any loan from any lender selected by a borrower.
- Fully disclose the process used to select preferred lenders.
- Provide consumer information about preferred lenders' loan products, including competitive interest rates, terms, and conditions; high quality loan servicing; or additional benefits beyond the standard terms and conditions.
- Explain how the Master Promissory Note preserves a student's right to select a lender.
- Ensure that preferred lenders disclose agreements to sell their loans to other entities.
- Select preferred lenders based solely on the best interests of students and parents.
- Ensure that no employee or agent of a lender is identified, either directly or by implication, as an employee of the institution.
Make objective decisions and give objective advice to institutions regarding relationships with entities involved in student financial aid
Financial aid professionals must always be fair-handed when recommending or entering into a business relationship with any entity offering a product or service related to financial aid. Preferred lender lists must not be based on benefits provided to the institution or an employee of the institution. A lender should also not be included on a preferred lender list for federal loans because of private loan benefits it promises to provide. In addition, financial aid professionals should not arrange alternative loan programs that disadvantage students or parents who do not receive those loans.
However, some relationships inherently create conflicts of interest. Goldstein urged attendees to use their institution's conflict of interest form. "You can't be hurt by what you disclose, but you can be hurt by what you don't disclose," he said. Refrain from soliciting or accepting anything of more than nominal value from entities involved in the making, holding, consolidating, or processing of student loans.
This provision is intended to avoid the appearance of conflicts of interests that arise when financial aid professionals accept benefits from lenders. Even if an advantage is not provided to the lender, any benefits received by financial aid professionals create an appearance that they may not be acting solely in the best interests of borrowers.
"In our profession such an appearance can do great harm, and it must be strictly avoided," Goldstein said.
Receiving anything of value (including reimbursement of expenses) for serving on an advisory board or as part of a training activity is prohibited under this provision. Providing lenders with financial aid professionals' expertise and perspective is valuable. Similarly, professional development is essential, and lender-sponsored training can be valuable. However, receiving remuneration from a source other than the institution, even in the form of reimbursement for expenses, creates an impermissible appearance of a conflict of interest and must be avoided.
"People have said this is absurd and have questioned why they have been put under such strict guidelines," Goldstein said, adding the code is not changing most behavior and the public needs a response.
Audience members expressed concern that state and/or federal legislation might prevent state, regional, and national associations from providing funding to financial aid professionals for training and consulting. Steinbach and Goldstein said that associations, institutions, and financial aid professionals should not radically change their practices at this point because there are still too many variables.
"The lack of certainty and clarity will narrow as time goes on," Steinbach said. "In the short term everyone should be cautious, have some serious conversations, but don't radically change practices at this point. It will work its way out relatively soon."
The term "nominal value" is used intentionally in this provision because many states and institutions have laws and policies that define "nominal value." As a general guide, a $10 retail value is considered reasonable.
Steinbach noted that the code is still a work in progress. He said that pending legislation may change the code, and NASFAA plans to issue a white paper describing provisions in laws that impact the practices of financial aid professionals.
"The code was not developed in a vacuum," Steinbach said, stressing that the code was developed during a period of flux in the student loan program. However, he noted that the code was a solid foundation to build ethical practices in the financial aid office.
Goldstein recommended that institutions and financial aid professionals use the recent attention and scrutiny as an opportunity to improve the loan programs.
"We should welcome objective analysis of what is going on," he said. "We need a pragmatic look at the entire system. We can stand scrutiny and we should welcome it. The code of conduct is important because it says, 'We get it. We have been working to improve the program and we will continue to work at it.' "
Haley Chitty is assistant director of communications at NASFAA, www.nasfaa.org.