Flirting with Financial Aid

If being a financial aid officer sounds like a boring desk job, think again. Apple iPods, portable DVD players, and trips to the Caribbean are just a few perks that private loan institutions offer to university officials in the hopes of being included on their “preferred lenders” lists. Since financial aid offices recommend private loan options based on these lists, lenders have resorted to extreme marketing strategies to ingratiate themselves with college officials.

According to the College Board and The New York Times, around $13.8 billion was taken out in private loans by students during the 2004-2005 academic year, a figure that has grown 10-fold in the last decade because tuition costs are growing faster than inflation. With most universities listing only two or three “preferred lenders,” this much is clear: Being on the favored list means business.

Business interests, however, do not coincide with student interests, and financial aid officers who accept gifts from lenders betray the trust of students. Students and their families have an obligation to educate themselves about their aid options, but navigating the numerous choices available can be bewildering to those unacquainted with the process. For many people, financing a college education is their first introduction to loans, and it’s essential that colleges provide them with accurate information about the market. There is a reason why Congress, in 1986, prohibited lenders from using inducements to court applicants for federal student loans.

Regardless of whether financial aid officials make a conscious choice to be biased in the face of such incentives, they cannot avoid distorting their preferences on a subconscious level. Humans have a fundamental psychological need to reciprocate; a study shows that when doctors received free gourmet lunches from pharmaceutical companies, a significant increase in sales from prescriptions was measured. Even when cheaper generic alternatives were available, doctors prescribed more expensive proprietary drugs after accepting such gifts. Why should financial aid officers be any more immune than doctors to basic human proclivities?

Fortunately, the College does not appear to have a preferred lenders list. Undergraduates who are U.S. citizens or permanent residents with good credit histories can borrow up to the full cost of attendance (less financial aid) through the federal Direct PLUS program in addition to the standard federal direct subsidized and unsubsidized student loans. Other residents of the U.S. or Canada, as well as international students with an eligible co-applicant, can borrow up to full cost through the Massachusetts Educational Financing Authority, a non-profit state organization created by the state legislature in 1982 to provide inexpensive student financing programs. The College’s Financial Aid Office’s (FAO) Web site, moreover, seems to give a fair side-by-side comparison of all the available loan options while refraining from advertising any specific private programs for those ineligible for federal and state loan programs.

Harvard’s graduate schools, on the other hand, do have one common preferred lender: Citibank. According to the Harvard Business School (HBS) Web site, HBS finalized an agreement in 1998 with the Student Loan Corporation, a subsidiary of Citibank, under which Citibank would be granted preferred lender status. While international students can receive direct subsidized loans from HBS, the school also advertises CitiAssist loans, which have higher interest rates than the Federal Direct Stafford/Ford Loans and the Federal Perkins Loan, but are available regardless of citizenship status and have more flexible credit requirements.

Similarly, while Harvard Law School (HLS) offers international students direct loans through the HLS Loan Program, the CitiAssist loan through the Harvard Education Loan Program and Citibank Stafford loans are also advertised prominently on the HLS Web site, with this statement in small print: “There are many other lenders (such as Access Group, Nellie Mae, and Wells Fargo) available for your Stafford loans that we are not able to outline here...the incentives vary according to the lender.”

HBS Director of MBA Financial Aid Susan S. Gilbert wrote in an e-mail yesterday, “Since the private loan program we have with Citibank is a no-fee, sub-prime loan, we’ve seen very little interest in borrowing private loans from other lenders.” The same sentiment was echoed by HLS Assistant Director of Financial Aid Denise Ryan, who maintains that “we list Citibank because they have very favorable Stafford terms.”

But negotiating a preferred lender agreement does not excuse financial aid offices from fully informing students about their options and the different incentives that various lenders offer. When asked why more comprehensive loan comparison data isn’t available in a brochure or on the HLS Web site, Ryan cited time and space limitations, saying that “we just don’t have it put together,” while dismissing the University’s preferred lender agreement with Citibank as irrelevant. Moreover, University Financial Aid Liaison Officer Laurie A. Hogan told The Crimson that the University’s contractual obligations with Citibank are limited to the bank providing funding at below-market interest rates in exchange for Harvard’s agreement to risk-share on the portfolio. Hogan explicitly denies that Harvard receives any form of kickback on these funds and maintains that students’ best interests are at heart.

Yet the fact stands that the only private lender listed by many of Harvard’s schools on their financial aid Web sites is Citibank. Harvard should offer its students a more comprehensive picture of the range of options available to them, and in this spirit, the University should take action on two fronts: First, the graduate schools ought to compile and distribute data about private lenders unprivileged by preferred status; and second, a written policy should be published on financial aid Web sites stating that the University and its officials will reject kickback payments and other gifts as part of transparent negotiation processes. Only by doing so will students be able to make informed decisions about the best loan programs tailored to their needs. Because the burden of protecting students falls on the University, it is imperative that they be scrupulous in carrying out this responsibility.