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Financial Aid

Student Loan Borrower Beware

How to help students avoid borrowing pitfalls
University Business, Jul 2008

IN THE WAKE OF LAST YEAR'S investigations into loan provider and financial aid office relationships, some campuses hesitate to recommend any lender for fear that they'll be perceived as steering business to certain lenders.

Unfortunately, a lack of unbiased counseling from the financial aid office leaves students and parents alone to decipher complex student loan terms and makes them vulnerable to sometimes misleading direct-to-consumer marketing.

The height of the student lending season has arrived, and fierce competition for student loan volume drives a few lenders to use misleading marketing practices, sometimes even encouraging students to avoid the financial aid office. These techniques can be detrimental to a student's financial future and are unnecessary, according to the Consumer Bankers Association (CBA).

These solicitations often resemble actual loan documents or look like government-issued letters.

"There can be no worse advice to students and their families than to rely exclusively on the internet or direct mail solicitations to learn about and apply for a student loan," explains CBA President Joe Belew. "Recent advertisements by one student loan lender implying that borrowers should not consult with the financial aid office at the institution they are attending are inappropriate and a complete disservice to students."

While marketing practices recommending an end-run around the aid office are certainly the exception, administrators at higher ed institutions should be aware that they exist and protect students and parents by ensuring that they are counseled by the financial aid office before they take out student loans.

Several IHEs have sent the National Association of Student Financial Aid Administrators examples of direct-to-consumer (DTC) mailings. Envelopes marked "Confidential," "Open Immediately," "Final Notice," and "Urgent" are used.

Many of the mailings not only attempt to lead students and parents away from the financial aid office, but also to steer them from federal student loans and other forms of financial aid. One solicitation promises students up to $40,000 a year, underscoring that the money will go directly to the borrower without having "to fill out any federal forms." Another boasts, "Funds are now available to parents without all the complexity and restrictions associated with traditional student loan sources." A recent ad campaign placed in major media outlets features individuals with their heads sawed off, with the quote, "I didn't use my brain; I went right to the financial aid office."

Some lenders mislead students and parents with inaccurate information. One student was sent a solicitation to consolidate immediately because of the "student loan tax" recently proposed in the president's budget and in legislation that "would cause lenders to discontinue their rate reductions" the borrower could be receiving on current loans. Another borrower received a letter from an unidentifiable lender with the words "Rebate eligibility notification" printed in all caps on the outside. The notice reads, "Contact us immediately regarding your Federal Student Loans. Our records indicate that you may be eligible for a rebate up to $2,000."

These solicitations are often sent in disguise to resemble actual loan documents or, worse, to look like government-issued letters. Lenders may use phrases like "from the Student Loan Department" or "Department of Student Finance" to try and confuse students. Others use a slightly altered Department of Education insignia to draw attention.

According to <em>U.S. News & World Report</em>, the federal student aid ombudsman has received about 100 complaints about inappropriate DTC marketing materials suggesting that the lenders are affiliated with the federal government. Complaints are forwarded to the Federal Trade Commission, which reports having received almost 600 complaints about deceptive DTC marketing practices by student lenders since 2000.

Administrators face an uphill battle to inform parents and families about and discredit these misleading advertising efforts. So making a concerted effort to have all students contact the financial aid office before borrowing student loans is key. This visit can save students-and institutions-from serious problems.

In most cases, the negative impact of a student's borrowing without consulting the financial aid office is felt by the student, the family, and the institution. Unfortunately, low-income borrowers are the most likely to fall victim to misleading advertising. Student loan terms are complex and virtually indecipherable for those with little or no knowledge of financing. Students who borrow directly from a lender without consulting the aid office are more likely to:

Miss out on federal, state, and institutional financial aid.

Take out loans, especially private loans, before exhausting other forms of aid.

Receive loans with less than optimal rates and terms because they do not understand what they are signing.

Borrow more than they need, resulting in excessive debt.

Choose more costly loan products.

Providing student loan counseling before students borrow can help families avoid many pitfalls and ensures that more students can successfully complete their program. Schools must also make sure that aid received doesn't exceed the Cost of Attendance when certifying loans, since the school would be responsible for repaying the over-award.

Students who receive more grant aid before borrowing will have less debt and be less likely to drop out because of unmanageable finances. Similarly, those who borrow only what they need and get a better deal on loans will be less likely to default on their loans after graduation. Also, these graduates will be in a better position as alumni to support the school, and may have more positive feelings about their school experience.

Most students and parents who have been misled by DTC marketing usually end up in the financial aid office seeking to undo the damage done by their poor financial choices. Providing up-front counseling can help prevent these problems from occurring in the first place.

In addition to offering unbiased student loan advice, the financial aid office has comprehensive knowledge about all available financial aid options.

The key takeaway here: Make sure all students consult the financial aid office before borrowing. This should be a campuswide effort, as it can't be achieved solely by the aid office. A little time invested up front-e.g., posting information online, prominently including it in application materials, integrating it into academic advising processes-will help students as well as colleges and universities avoid student loan pitfalls.

<em>Haley Chitty is assistant director of communications at NASFAA,</em>;