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Daily Aid 3: Inducements, Student Loans, Outside Scholarships

September 5th, 2008

Daily Aid 3: Inducements, Student Loans, Outside Scholarships

Student Financial Aid News

“The attorney general of New York is preparing a lawsuit against a student loan company, Goal Financial, charging that the lender broke state and federal laws by luring borrowers with iPods, cash and other gifts and that it misled consumers about loan terms and benefits, said a senior official in the office,” The New York Times reports. “The attorney general, Andrew M. Cuomo, has been investigating the student loan industry since early last year and has uncovered an array of troubling practices. Separate from the Goal lawsuit, the office is close to agreements with about a dozen loan companies on what marketing tactics are appropriate, according to the official, who cited the investigation and the pending lawsuit as reasons he could not be identified. ‘The hope is that those settlements will set a new industry standard when it comes to how direct-to-consumer lenders are operating,’ the official said. Goal is being sued because it has failed to demonstrate a willingness to change its practices, he added.”

Commentary

The article’s a little unclear about the issue of inducements. Inducements, if you weren’t tuned into the Financial Aid Podcast, are promotions like free iPods, phones, etc. - anything given to a student or a financial aid administrator in exchange for loan applications. In the article, it was unclear whether or not Goal was using inducements for federal or private student loans; inducements are illegal for any form of federal student loans, whether they’re new loans like the Stafford loan or the PLUS loan, or consolidation of existing student loans, or private, non-government student loans. Inducements, while not a recommended practice, were not illegal for private student loans until recent legislation.

Corporate disclosure, of course, the Student Loan Network has not and never will use inducements as a promotional method.

What this means for you is fairly straightforward - no student loan company should be using inducements of any kind, bartering goods for your business. If you see a company doing that, it’s illegal. That said, there’s a distinction in how the law is written. Inducements have to be quid pro quo, or “this for that”. A company can give away free iPods, etc. as long as there is no expectation of business generated, or a contract that binds you, meaning that a legal obligation to do business with that company was created because you took the free item. What some other student loan companies are being sued for is essentially requiring you to sign a binding legal contract - a student loan application - for a trade good, especially if the value of the freebie is disproportionate to the contract’s value.

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Mail Bag

Chris - I’m a bit confused. You’ve consistantly said students should apply for as many scholarships as possible, but some sources (ex. book - What parents don’t want you to know - or something like that) and some colleges, say that any outside scholarship money reduces the grant they will give. Nothing seems to help the EFC or the student’s amount of loans if grants are offered. Just seems to reduce the college’s part. The 529 savings plans seem the same. Am I getting this right? So where is the benefit to the student/parent? Thanks. Helen

Helen, you’re absolutely right that outside funding sources do count against institutional aid. Every dollar that you bring in from outside sources reduces what the university has to find and contribute. Outside scholarships also alter the EFC, the expected family contribution, because they essentially count as a form of cash that your family has at its disposal to pay for school.

How a school’s financial aid office handles outside scholarships when it comes to your financial aid award varies from school to school. The very best school financial aid offices will, in your award letter, reduce loans that are in your package with the outside scholarship money, so that the total cost of your college education is lower. Other schools will indeed reduce their institutional grants with the outside scholarship money instead. How a financial aid office handles outside scholarships in your award letter largely depends on how much money the school has and the philosophy of the financial aid director. Schools with very small aid budgets typically will be the ones to discount your grants, because they need to scrape together every dollar they can, and if you’re winning outside money, they can help other students. Wealthier schools who have an endowment will take away your loans and leave your grants because they have the funds to draw on.

What will your school do? You’ll have to ask your financial aid office and check your award letter.

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