AAMC Reporter: August 2007

Academic Community Responds to Student Loan Scrutiny

Public controversy surrounding misconduct in the student loan industry has led lawmakers and stakeholders around the country—including medical schools—to revisit or update ethical guidelines governing the practice of financial aid in higher education.

Several state and federal laws are under consideration or have already been enacted, and several organizations are drafting guidelines that reinforce acceptable conduct for financial aid officers and help ensure that they offer objective financial advice to students.

One issue at the center of the controversy is what student loan administrators refer to as "preferred lender lists," a device by which financial aid officers commend specific banks and student loan companies to the attention of potential student borrowers. The purpose is to guide students to lenders with competitive rates, a history of reliability, favorable customer service, and other factors.

"For medical students, because they borrow high volumes of loans, we can expect a very high level of interest from lenders, and very competitive pricing and service," said Daniel Burr, Ph.D., director of medical student financial aid at University of Cincinnati College of Medicine. "It is through lender lists that we can take advantage of these things by finding the best lenders and presenting them to our students."

With 86.6 percent of graduating medical students leaving medical school with an average debt load of more than $130,000, student financial aid is clearly big business. And as companies and schools recognized the power of an institution's preferred lender list—which most students use to find their lender—some began employing questionable methods when it came time to decide who made the list.

In 2005, financial aid officials at Florida International University issued a request for proposals from banks and student loan companies for inclusion on their preferred lender list. The university asked that lenders agree to sponsor financial aid workshops and recruitment events and provide refreshments for students and parents, among other things, which appeared to some as tantamount to demanding bribes.

Another incident occurred this year, when the Princeton Review drew the ire of university officials for its Web site, which seemed to imply the lender My Rich Uncle was the "partner" lender of not only the Princeton Review, but particular schools portrayed on certain pages on the site. A report released in June by Sen. Ted Kennedy (D-Mass.) revealed that student lender "deals" with universities and "perks" provided to financial aid officials were more common than had previously been disclosed. Of the approximately 12,000 financial aid professionals nationwide according to the National Association of Student Financial Aid Administrators (NASFAA), only a handful— and none at any medical school—have been charged with wrongdoing.

Political leaders and various organizations are formulating plans to address and reduce potential conflicts of interest in the aid industry. The U.S. Department of Education may soon draft regulations banning or strictly controlling preferred-lender arrangements. On June 29, department officials sent a letter to more than 900 universities recommending caution in how they construct preferred lender lists. Earlier this year, it issued draft regulatory changes that would prohibit colleges from soliciting "financial or other benefits" in return for placement on their lists of lenders.

In Congress, the Student Loan Sunshine Act would require universities to disclose arrangements with private lenders, create new reporting requirements for financial aid offices, and ban lenders from offering gifts or services to university employees worth more than $10. This legislation has been included in the Higher Education Act reauthorization packages currently before Congress. The Senate approved the Higher Education Amendments of 2007 July 24 by a 95-0 vote. The House of Representatives has passed a similar measure, and the two sides will have to agree on the final language before it goes to the White House for consideration.

In the spring, New York Attorney General Andrew M. Cuomo announced that he had brokered financial settlements requiring that several schools reimburse students money they were paid by lenders for loan business. Cuomo also asked schools to adopt a College Code of Conduct, which prohibits revenue sharing between lenders to schools, requires disclosure standards and restrictions on how lenders are chosen for preferred lender lists, and bans gifts to university employees from lenders.

Financial aid organizations around the country are taking the opportunity to review and update their own standards of professionalism. NASFAA is developing a code similar to Cuomo's. Medical schools and the AAMC are taking their own action.

"I think we had our eyes opened by this," Burr said. "We fully realize the opportunities for abuse, and the danger of an impression of conflict of interest, even if there isn't one. At conferences and meetings, there will be sessions and discussions on this. We have never addressed this issue as thoroughly as we are doing now. So in a sense, that is a positive that came out of all this."

The AAMC Group on Student Affairs' Committee on Student Financial Assistance is drafting guidelines specifically for medical school financial aid officers. The idea for the document, called a "Statement of Effective Interactions in Financial Aid," came about in the wake of the Princeton Review controversy, and contains several recommendations to financial aid officers, including:

• Seek to provide the information necessary for students to acquire the most affordable loans;
• Strive for full transparency in their interactions;
• Ensure that all interactions with lenders have the best interests of students at their center;
• Act in an ethical and professional manner consistent with established industry standards;
• Work with lenders that provide affordable loans and competitive benefits without gimmicks;
• Work with lenders that provide high-quality service;
• Be knowledgeable of student loan policies and offer unbiased training and educational opportunities to borrowers and financial aid professionals; and
• Act as trusted partners in their interactions within the medical school financial aid community.

"To establish and maintain trusting relationships with their students, it is imperative that financial aid professionals fully disclose all institution and personal-lender arrangements and relationships," the report states.

"Preferred lender lists are one effective tool for directing students to the most favorable loans, and the processes used for developing these lists are established with care to preclude bias. The criteria used to develop these recommendations are made readily available to borrowers."

The committee is currently finalizing the document, which is scheduled for consideration by AAMC governance in September.

By and large, financial aid officers are cautiously welcoming of new guidelines and legislation, and hope any new regulations do not hamper their ability to cultivate honest business partners, and in turn recommend reputable firms to students.

"Some of the legislation is absolutely good," said Stacey McCorison, Duke University School of Medicine's assistant dean for medical education administration. "As long as it keeps a focus on what is good for students and their families. As long as we have an opportunity to voice our opinions on lenders, then it will be good."

Teddie Milner, financial aid for the University of California, Los Angeles, David Geffen School of Medicine, said she has observed that universities are taking a strict approach to financial aid officer dealings with lenders.

"I think [the universities and departments] have taken a hard line approach on this," she said. "I do feel we need more guidance, but I don't want us to throw out the baby with the bathwater."

Burr said college students—and medical students in particular— should not be left to navigate the financial aid industry alone, which may happen if policies become too limiting.

"There is some fear that the reporting requirements for financial aid officers could be so burdensome that schools could opt out of the practice of recommending lenders," he said.

"What we are talking about in terms of medical students is that they are borrowing hundreds of thousands of dollars. That's a sizable amount. And after graduation, doctors have serious time demands. So the management of a debt of that size is a serious issue. So I think it would be a very negative thing if financial aid officers could not offer guidance on this, based on our knowledge of programs that we know the history of," Burr said.

"It's a jungle out there," Burr continued. "If we had to tell students to go to the Web to find themselves a lender, I think that would have a negative effect on students going to medical school."

If new regulations hinder financial aid officers' ability to offer objective loan advice to students, a spike could occur in businesses that communicate and deal directly with students, which could result in new pitfalls for students.

"A lot of the new, direct-to-consumer private lenders employ marketing techniques that we are frankly not used to," McCorison said. "Some students have made mistakes as a result of this, because they are just not in a position to have all the knowledge here. Students are supposed to be students, and not be business savvy."

If financial aid officers are removed from the equation, they would be difficult to replace, according to Burr.

"There are only two sources of expertise on student loans—financial aid officers, and the lenders themselves," he said. "We know more about these loans than financial planners, for example. We know how to find a good product for the students. If students were on their own with direct-to-consumer marketing, the students might lose their advantage. There's no chance to advise students. The lender just wants business, which is fine, but you have to be careful about small print."

Improvements to the system are happening beyond the realm of regulation as well. Those familiar with the financial aid system have contended that new technologies will help foster quicker loan processing and better tools for tracking loans as they move through the pipeline. Existing technology can help increase transparency in the interim, McCorison said.

"For years, many of us have posted information on our Web site about how we chose who gets on the lists," she said.

No one is precisely sure how these debates will change the financial aid system in higher education or in medical school, but experts agree that a deliberate approach is necessary.

"We're still figuring all this out. We're waiting to see what our relationships will be with student borrowers and lenders, and our role as financial aid officers between the two," Burr said. "The critical point is the way we fund medical education. That is by borrowing a large amount of federal funds. For students who are going into such debt, to offer them no assistance is a great disservice to the student, perhaps even a danger to society. If over time, students ceased relying on or trusting financial aid officers, that could be a problem."

—By Scott Harris

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