Controlling Tuition Discounting By Leveraging Private Loans

Micharl O’Grady
Overture Technologies

There has been much discussion over the last two years about financial aid offices maintaining a ?preferred lender list? for their students and families. Back in the 1980?s when many colleges and universities did not recommend specific lenders, schools would get student loan checks from credit unions, community banks and some large regional lenders. The processes were painfully slow and the cash flow was spread out over months.

With the advent of better technology and sweeping standardization, schools in the mid 1980?s could start transmitting student loan data electronically and receive the funds through electronic fund transfer (EFT)?vastly increasing the turnaround time and cash flow. As a result, financial aid offices started to recommend those lenders that created the least amount of work for their offices and met the customer service demands of their students and families.

In the 1990?s, when the technological playing field leveled off, institutions would recommend lenders based on borrower benefits and customer service. Fast forward to 2007, the idea of having a ?preferred lender list? fell under great scrutiny, and rules changed so that financial aid offices were required to clearly articulate how they selected recommended lenders. The new regulations applied to federal student loan lenders as well as private or alternative student loan providers.

The plug has now been pulled on the 45-year-old Family Federal Education Loan Program and replaced by Direct Lending (DL) with the federal government serving as lender for federally backed student loans. So is the process of vetting educational lenders no longer necessary? Not when it comes to private education loans.

Unfortunately there is a great deal of misinformation and concomitantly great angst in financial aid offices regarding recommendations for private loan lenders. I recently attended a conference for college presidents and a feature consultant in a well attended session proclaimed that lender lists or guiding parents to lender choices was no longer legal! The problem is that this is simply not true. Private/alternative loans are a valuable and increasingly necessary tool for families as the gap between financial aid available from traditional sources and the actual cost of higher education grows.

One common theme over the last twelve months or so I have heard at higher education conferences is the necessity to mitigate the growth in tuition discounting.

The poor economy has forced reductions in state grant programs all over the country.

While we can expect modest increases in the Federal Pell Grant, the increases are not likely to keep pace with cuts in funding from the states and increases in tuition and fees.

The Obama administration was able to pass a bill making significant changes to the federal student loan program, but the provisions to increase funding were not included.

The availability of private loans has shrunk by about 10 BILLION dollars—approximately half of the capital available before the turmoil in the markets.

Home equity loans are no longer an option for many families.

Stock portfolio?s are down significantly.

Schools cannot afford to fill these gaps with additional tuition discounting.

How can enrollment managers better utilize private loans to enable their families to meet growing costs? A good start would be to get financial aid literacy tools to our admissions and financial aid offices so they can give guidance to prospective students and families.

Ironically, in times when families need financial guidance the most, the financial aid community plans on doing the least. According to Tim Ranzetta from Student Lending Analytics, 29% of financial aid offices plan on providing no recommendation lists for their students and families and 24% plan on throwing prospective students and families a list of all private lenders with no guidance. Imagine if a high school guidance counselor told a college-bound student ?Here you go?? and handed the them the Higher Education Directory. Last according to Ranzetta, 30% of financial aid offices are not sure what they are going to do. So the question is why?

According to Ranzetta, the top two reasons for financial aid offices giving no guidance on private loans is concern about complying with new regulations and the time it takes to maintain the list. Fortunately, there are loan search engines that on average could save a student $4,000 in interest on a $10,000 loan. If you extrapolate that across your student body, the savings is huge. Would someone not digest the regulations or take the time to sort out choice if it meant a student getting a $4,000 Pell Grant?

The technology exists today where administrators can satisfy the new regulations with ?in a box? solutions and there is no maintaining of a list?just finding reputable search links. Without guidance, students can make poor choices. Getting 12,000 choices on Google is only putting your students in harm?s way. More expensive private loans will only increase the probability that students will have to choose between paying their private loan or a federal loan upon graduation, driving up your school?s default rates.

All private loans are not created equal. By taking the time to research the best options for your students, you will be doing them a great service and assisting your institution in achieving desired recruitment and retentions goals. Proactive utilization of private and alternative loans can reduce discount rates as well. By leveraging new technologies you can eliminate some higher education blood, sweat, and tears. The bleeding of tuition discounts, the sweat? of finding reputable loan money for students and the tears of the prospective student who can?t attend the school of their dreams?. or worse yet, has to leave one.