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Colleges warned to give students more variety of lenders

WASHINGTON – In their most aggressive action yet in response to problems in the student loan industry, U.S. Department of Education officials said that they have sent warning letters to more than 900 colleges and universities reminding them not to limit student choice in picking a lender.

The letter was sent to campuses where 80 percent or more of the federal student loan volume in 2006-2007 was handled by one lender.

Jeff Baker, policy liaison at the Education Department’s federal student aid office, said a search of a student loan database revealed that a vast majority of students at each of 921 campuses chose the same lender.

"That was a little flag to us that perhaps the institution isn’t quite being open enough to their students and parents," Baker told thousands of college financial aid officials gathered for the annual conference of the National Association of Student Financial Aid Administrators.

The letter, dated June 29, marks the first time the department has sent targeted letters to campuses in regards to their use of preferred lender lists.

Baker said that campuses could face fines or be barred from participating in the federal lending program, known as FFELP, if they violate the department’s student loan policies. That also includes a prohibition that bans college administrators from accepting gifts, payments or other perks in exchange for steering student borrowers to a particular company.

Some critics say the Education Department’s involvement is overdue, coming in the wake of federal and state investigations into the $85 billion student loan industry, including arguably cozy relationships between colleges and universities and lenders.

New York Attorney General Andrew Cuomo has accused the department of being "asleep at the switch" in its oversight of college loans.

"This is a good step … but they should be far more aggressive in policing the relationships between lenders and colleges," said Michael Dannenberg, education policy director of the non-profit New America Foundation.

The financial aid group’s national conference comes soon after several college-aid officials lost their jobs after it was revealed that they held stock in companies on their universities’ preferred-lender lists. Meanwhile, other colleges and universities that received fees from lenders based on the number of student loans issued agreed to reimburse students.

But pending federal legislation and proposed regulations by the Education Department would include a requirement that schools list a minimum of three unaffiliated lenders and disclose how the lenders were chosen.

Supporters of such lists, which have become common practice, say they protect students by pointing them to reputable companies.

The Education Department did not provide a list of schools that were sent the letter last month.

At a conference session Monday afternoon, attorney John Dean of Washington Partners, LLC told an overflowing room of financial aid counselors that if their institutions received the letters, they "better take a look at their rationale" for why such a large share was held by one company.

© 2007, Chicago Tribune.

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