Student Loans: Outlook 2008

Scandal rocked the student loan industry in 2007-what's on tap for 2008?

When Jackie, the TV weather person, gives her prediction for the week, you don't expect her to mention what's happening in the student loan industry. That's a good thing, because the outlook might involve lingering thunderstorms and high-pressure systems, as colleges and lenders try to rebound from some bad business that was uncovered last year.

Student loans and scandal

In 2007, the student loan industry was marred by scandal. Some colleges and universities were found to have revenue-sharing agreements with lenders who were receiving financial kickbacks for funneling their students to only one lender. As a result, nearly 1,000 colleges and universities received letters from the Federal Student Aid office (FSA) reminding them of their responsibility to provide students with several lender options. A few months after sending the initial batch of letters, the FSA followed up with 55 colleges and 23 lenders, asking for further documentation of their student loan activity.

Stricter standards

In the aftermath of last year's scandal, colleges and student lenders can expect 2008 to be characterized by stricter interpretation of existing legislation, further scrutiny into college records and, possibly, enforcement actions to protect a student's right to choose his own lender.

The Higher Education Act of 1965 (HEA) doesn't permit colleges to receive payments from lenders in exchange for student loan applications. The exact definition of what constitutes an enforceable violation, however, is open to interpretation. Traditionally, the FSA has acted on the belief that a violation happens when the lender gives the incentive specifically in return for exclusive student referrals. But the lender has been allowed to provide schools with other types of incentives, such as those intended to further the lender's advertising, branding, or goodwill objectives.

A lender's burden

In the latter part of 2007, the FSA announced that a new interpretation of the HEA will take effect in July, 2008. Under the new interpretation, the FSA places the burden on the lender to prove that payments made to colleges were not for the purposes of obtaining student loan applications. This burden of proof may make it difficult for lenders to partner with colleges on any type of business development program.

The FSA might also start conducting more on-site reviews of a college's financial aid records, as well as their business dealings with lenders. These examinations may go as far as reviewing relationships between lenders and affiliate groups, such as alumni organizations. While the existing federal legislation doesn't prohibit arrangements made between lenders and affiliate groups, at least one lender in 2007 was forced to stop paying an alumni group for exclusive student loan referrals.

Where schools or lenders are found to be non-compliant, the FSA may initiate action to suspend or terminate that entity's participation in the Federal Family Education Loan Program (FFEL). Hopefully, such measures can be avoided, because the students will be the ones to get stuck in the downpour.