2008 College Board Midwestern Regional Forum, Chicago, ILPage 1 The Preferred Lender List Controversy ___________________________________________ John.

2008 College Board Midwestern Regional Forum, Chicago, IL Page 1

The Preferred Lender List Controversy

___________________________________________

John Marcus

Senior Vice President for Business Development

The Education Resources Institute___________________________________________

Rick Shipman

Director of Financial Aid

Michigan State University____________________________________________

2008 Midwestern Regional Forum


Goals of Session

• Speaker perspectives

• Review student loan landscape

• Evolution of student loan investigation

• Legislative response

• School, lender, guarantor response


About

Michigan State University


MSU on the Map


• Founded in 1855

• Nation’s first land-grant institution

• Located in East Lansing, Michigan

• 5,200 acre campus

• Largest residence hall system in US• 24 halls and 3 apartment villages

Campus


Academics• 200 academic programs

• 17 degree-granting colleges

• 3 medical colleges

• Private, affiliated law college

• 49,000 students from

• All 83 Michigan counties

• All 50 states

• 130 countries

• 240 study abroad programs in 60 countries/all continents

• 11,000 faculty/staff


The Office of Financial Aid has…• 43 regular employees

• 3 full time/5 part time campus locations

• 72% of students receive financial aid

• $438 Million paid in 2006-07• $ 263 M – Loans

• $ 120 M – Grants/Scholarships

• $ 53 M – Fellowships/Sponsors/Educational Trusts

• $ 2 M – Work Study


Loans at MSU

• Joined FDSLP in Year 2

• Rejoined FFELP for Fall 2003

• Exercising School Lender Option


Loans at MSU

Loan Use at MSU

$-

$50

$100

$150

$200

$250

$300

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Mill

ions

Private

Federal


Loans at MSU

• 2007-08 Federal Loans

• 39 FFEL Lenders

• 3 account for 99% of loans

• 29,601 Loans for $100 Million

• 2007-08 Private Loans

• 11 Primary Lenders

• 6 account for 90% of loans

• 2,390 Loans for $12 Million


Loans at MSU

Private Loans at MSU

Year#

Borrowers Total Disbursed$ Increase for

Year% Increase

for Year% Increase

All Years1996 137 700,940$ NA NA NA1997 262 1,215,247$ 514,307$ 73% 73%1998 360 1,757,326$ 542,079$ 45% 151%1999 552 2,904,873$ 1,147,547$ 65% 314%2000 884 4,794,405$ 1,889,532$ 65% 584%2001 1147 6,158,432$ 1,364,027$ 28% 779%2002 1204 7,569,725$ 1,411,293$ 23% 980%2003 1519 10,995,326$ 3,425,601$ 45% 1469%2004 1693 12,661,729$ 1,666,403$ 15% 1706%2005 2053 15,965,961$ 3,304,232$ 26% 2178%2006 2709 22,705,006$ 6,739,045$ 42% 3139%2007 3162 28,417,348$ 5,712,342$ 25% 3954%


About

• Our Mission: Promoting educational opportunities to change people’s lives

• Established in 1985 as a 501(c)3 non-profit

• Located in Boston, MA

• Primary activities

• Promoting access to education for the underserved

• Guaranteeing private education loans


About

• Over 22 years of loan guarantee experience

• National reputation and significant expertise in college access, affordability and success

• Guarantee loans at over 6000 schools

• Guaranteed over $4 billion in 2007 and more than $18 billion since 1985


About

• Overview of the TERI Guarantee Programs

• Available at a broad base of schools

• Co-borrowers are strongly encouraged

• Widely used by respected lenders

• Loans are based on credit standing, not school of attendance

• Fair rates and fees for the entire student body


Student Loan Landscape

• Federal Loans

• FDSLP and FFELP

• Perkins

• Graduate and Parent PLUS

• Private Loans

• School Channel

• Direct to Consumer


Student Loan Landscape

• What Are Preferred Lender Lists?

• Why Do Schools Have Them?

• Apply to FFELP and Private Loans only

• Reduce confusion for borrowers

• Can reduce borrowing costs

• Improve processes for borrowers

• Improve administrative process for schools


Evolution of Student Loan Investigation

• Lender(s) complain of closed school doors

• New York Attorney General Andrew Cuomo opens a broad inquiry

• NASFAA chief issues denial

• Cuomo responds with evidence

• Congress/media/public take note


Evolution of Student Loan Investigation

• What did the investigation find?• Very little but achieved major headlines

• Aid administrators received personal gain

• Students denied choice of lender

• Inappropriate lender/school arrangements• Lender advisory boards

• Lender revenue sharing with schools

• Lender staffing assistance for schools

• Students steered to higher cost loans to benefit schools

• 56 schools out of 8,000 total have signed codes of conduct


Cuomo’s Reaction

• Code of conduct for schools/lenders• Student Lending Accountability, Transparency, and

Enforcement Act (SLATE)

• 11 lenders & 56 schools signed

• Some schools/lenders required to pay fines

• Push for new state regulations

• Push for new federal regulations


State/Media/NASFAA Reaction

• Media widely covered this as story of graft• Schools were targeted

• Lenders/guarantors/ED were targeted

• NASFAA Statement of Ethical Principles and Code of Conduct for Institutional Financial Aid Professionals revised and approved on 5/3/07• ““Commit to the highest level of ethical behavior and Commit to the highest level of ethical behavior and

refrain from conflict of interest or the perception thereof.”refrain from conflict of interest or the perception thereof.”

• 10 states instituted codes similar to NY’s SLATE Act• Florida, Indiana, Nebraska, New Jersey, Texas …


Federal Reaction

• Congress Demands Action• Kennedy launches own investigation

• Negotiated Rulemaking focus on ethical loan practices

• New Federal Regulations improve loan transparency

• College Cost Reduction and Access Act reduce profits

• Higher Education Act Reauthorization proposals

• Department of Education investigations

• 8/9/07 Spellings Letter to Schools


Spellings Letter Urges Schools

1. To protect the borrower’s choice of lenders;

2. To base lists of preferred, recommended, or suggested lenders, if provided by your institution, solely on the best interests of the student or parent borrowers, considering factors such as interest rates, fees, and loan benefits provided by the lender to the borrower;

3. To not request or accept any payments or benefits of any kind from a lender in exchange for being included on a preferred or recommended lender list or in exchange for the school recommending the lender to its students or parents;

4. To clearly and fully disclose to students and parents the criteria and process used to select the lenders for preferred, recommended, or suggested lender lists;

5. To ensure that employees of lenders who make loans to students or their parents do not identify themselves as employees of the institution of higher education and that employees or agents of a lender, servicer, or guaranty agency do not work in or provide staffing to an institution’s financial aid office unless they do so at fair market value; and

6. To ensure that the institution’s employees will not receive any gift, including travel gifts, of more than nominal value from any lender, servicer, or guaranty agency.


Spellings Letter Urges Lenders

1. To not provide any payments or benefits to an institution and its employees in exchange for being included on that institution’s preferred, recommended, or suggested lender list;

2. If included on a school’s list of preferred, recommended, or suggested lenders, to clearly and fully disclose any promises or offers relating to the terms of the loans or any services to borrowers that your organization made to be included on the list;

3. To ensure that the employees of your organization and its contractors do not identify themselves as employees of a school and to refrain from providing employees or agents to work in or provide staffing to a school’s financial aid office unless they do so at fair market value;

4. To refrain from offering anything of more than nominal value, including travel, to an employee of any institution;

5. To refrain from providing payment or gifts of more than nominal value to employees or agents of an institution who serve on an advisory board for your organization; and

6. To restrict use of the Department’s National Student Loan Data System to authorized personnel and for authorized purposes only.


So Where Are We Today?

• US House of Representatives

• HR 890, Student Loan Sunshine Act

• Passed 414 – 3 on 5/9/07

• HR 4137, College Opp. and Affordability Act of 2007

• Introduced 11/9/07; Vote scheduled for 2/7/08

• US Senate

• S 1642, Higher Educ Amendments of 2007

• Passed 95 – 0 on 7/24/07



• US Department of Education• Published final regulations on 11/1/07, most effective 7/1/08

• Borrower choice of lender (guarantor/servicer) absolute

• Minimum of 3 FFEL lenders on lists; minimum of 2 private lenders

• Selection criteria must clearly disclosed• No payments, benefits, loan deals allowed

• Must provide comparative data

• No processing delays permitted for non-preferred lenders

• No automatic assignment of lender/guarantor/servicer for 1st time borrower

• Loan benefits must survive sale

• Lender staffing of aid office prohibited

• Lender assistance to aid office must be transparent

• No opportunity loans or private loan agreements

• Aid officer participation on lender advisory boards regulated

• Must update list at least annually

• Note that some rules are less restrictive for guarantors/servicers



Preferred Lender List House Senate ED NY NASFAA

PLL Optional Yes Yes Yes Yes Yes

3 lender minimum Yes Yes Yes

May use unlisted lender Yes Yes Yes Yes Yes

Must disclose criteria Yes Yes Yes Yes Yes

Must disclose benefits Yes Yes Yes Yes

Benefits survive sale Yes



Permissible Activities Lender Guarantor

Conduct default aversion activities No Yes

Schools serve on advisory boards No Yes

Pay travel/lodging for board meetings No Yes


How is Michigan State University Reacting?


Loans at MSU

• We previously provided limited information• About suggested lenders

• About selection process

• About unfettered choice of lender

• We now provide enhanced information• Highlight borrower choice

• Explain role of players in process

• Reveal selection process and criteria

• In process of identifying lenders for full list


Loans at MSU


Loans at MSU


Loans at MSU


Loans at MSU


Loans at MSU


Loans at MSU


Loans at MSU


Loans at MSU


Loans at MSU

• What is the result of the changes?• Decreased trust

• Does the school benefit to the student’s deficit?

• Why does the school recommend so few?

• Commercial ads beat school endorsements

• Increased confusion• How do you select the right lender?

• What are the differences between them?

• Can’t MSU just tell me what to do?

• Unpredictable processes and funds delivery

• More work• Preparing to issue RFI for additional FFEL lenders


How is Lending Community Reacting?

• Some have instituted their own code of conduct or signed the NY AG code

• Taking a more cautious approach in dealing with school officials

• Cutting back on providing services to schools

• Reducing/eliminating borrower benefits

• Carefully watching what comes out of DC


How is TERI Reacting?

• Enhanced training of our sales team

• Working closely with lender partners and schools to convey any changes to our business

• Responding to many more RFIs/RFPs

• Promoting teri.org as a solution for schools who want multiple lenders


Questions and Discussion

2008 College Board Midwestern Regional Forum, Chicago, ILPage 1 The Preferred Lender List Controversy ___________________________________________ John.

Documents

msu slide

college access

private education loans

private loans

facultystaff slide

map slide

federal loans

affiliated law college