Des Moines Register
05-06-07
Loan work got colleges $1.5 million
Iowa Student Loan, schools defend 'Partnership' plan
By JENNIFER JACOBS
REGISTER STAFF WRITER
The nonprofit lender that dominates the college loan industry in Iowa has paid
colleges about $1.5 million over the last five years for processing students'
applications for its loans.
Critics say the money from Iowa Student Loan Liquidity Corp. could influence
financial aid staff to steer students to that lender's "private" loans, which can be
more expensive than federal loans because some rates and fees are higher.
Financial arrangements that benefited both lenders and colleges - at students'
expense - have been criticized by New York Attorney General Andrew Cuomo,
whose investigation into the loan industry found that some New York schools
were accepting fees based on the volume of loans they handled from a certain
lender.
Iowa Student Loan says its practices are different from those investigated
elsewhere because the money it offers to about 50 Iowa colleges is simply
reimbursement for financial aid offices' out-of-pocket expenses for administering
its loans.
The Iowa schools don't get extra money as a reward for processing more loans,
or higher-dollar loans, Chief Executive Officer Steve McCullough said. To get any
money in return, colleges have to document their expenses.
"There's nothing unethical about it, or we wouldn't be doing it," said Tom
Gronstal, an Iowa Student Loan board member and the state official who
oversees the banking industry.
State Sen. Herman Quirmbach, a Democrat from Ames, said Iowa needs
legislation to end the practice of paying out reimbursements.
"Whether they're legal or not, I'm very uncomfortable about it," Quirmbach said.
He added, "I want to see all the public colleges in the state - and the privates,
too, though we may not have legal authority to force them - refund to the
students who took out Partnership loans the proceeds of any payments received
by those colleges from Iowa Student Loan."
The private loans are known as "Partnership" loans.
Also, some board members of a state agency, the Iowa College Student Aid
Commission, have concerns about the types of loans Iowa students are taking
out and why Iowa students have one of the highest debt loads in the nation.
That's particularly true at Iowa State University, where students took out three
times as many private loans through Iowa Student Loan as did their counterparts
at other state public universities last year, state records show.
ISU students graduated with an average of $30,640 in debt last year. The
national average for public universities was $17,250 for 2003-04, according to
the most recent figures from the Project on Student Debt.
Meanwhile, a new study shows that the number of federal loans that parents take
out on behalf of their students is exploding in other states - but in Iowa, far fewer
families are taking advantage of that cheaper option.
ISU received $500,000 in reimbursements
Statistics compiled from Iowa colleges by the Des Moines Sunday Register show
Iowa Student Loan paid an average reimbursement of $23 per loan to private
colleges and $15 per loan to community colleges last school year.
Iowa Student Loan appears to base its reimbursement calculations on dollar
volume, at about $30 for every $10,000 in loans, the Register found after
examining information provided from about 40 schools.
ISU received nearly $500,000 in reimbursements from Iowa Student Loan
between 2002 and 2006. Last school year, ISU students signed three times as
many private loans with Iowa Student Loan than did students at the University of
Northern Iowa and the University of Iowa, two schools that have never accepted
reimbursement money.
ISU's financial aid director, Roberta Johnson, said the school used to list Iowa
Student Loan's parent loan as an option on its financial aid award letters for
students who needed extra money, but stopped because some students
mistakenly believed they were required to take out that loan.
ISU no longer takes the reimbursements.
"Because no one product can meet the needs of our diverse student body, we
made the decision starting in the 2005-06 academic year to provide comparative
information about multiple lenders for private loans," Johnson said.
McCullough, the CEO of the West Des Moines-based Iowa Student Loan,
defended the reimbursement policy, as did several Iowa college presidents and
financial aid directors. He said the reimbursement program "is legal under all
state and federal laws, and is not a volume-based incentive fee."
McCullough said his organization paid out an average of $300,000 over the past
five years to 47 schools, but would not provide a breakdown of which schools or
how much each received.
Other lenders who do business in Iowa, including Wells Fargo, Sallie Mae,
Nelnet and Citibank, do not pay colleges for handling their loans.
Other schools defend loan money
Kirkwood Community College in Cedar Rapids received $81,000 over the last
five years, more than any other school except ISU. The then-president of
Kirkwood, Norm Nielsen, was Iowa Student Loan's board chairman during that
period. In comparison, Des Moines Area Community College, whose enrollment
is slightly higher than Kirkwood's, received about $25,000.
The private and community colleges that do accept the reimbursements say they
reinvest the money in benefits such as scholarships or financial aid staff training.
Grand View College has received $35,000 through the Partnership loan program
- so named, Iowa Student Loan says, because it's intended to be a cooperative
effort with colleges - since it began during the 2001-02 school year.
The reimbursements "in no way influence our decision to include Partnership
loans in a student's financial aid offer, nor a family's decision to take the loan,"
Grand View President Kent Henning said.
Henning said that he's aware of the scandals being reported in New York and
elsewhere, but that Iowa Student Loan's reimbursements are completely different
from the reported kickbacks.
Grand View used its reimbursement for financial aid staff training, a computer
station for filling out financial aid forms, and emergency loans or grants to
students, Henning said.
All the schools said the reimbursements benefit students.
AIB of Des Moines reported its $20,000 went to scholarships. Clarke College has
used some of its $23,000 to purchase equipment and to train its financial aid
staff. Some of Northwestern College's $25,000 was spent counseling families.
Mount Mercy College's $22,000 was deposited into its general fund "and is not
accessible by the Office of Financial Aid," President Christopher Blake said.
At Loras College, paid about $29,000, Iowa Student Loan is one of seven lenders
on a "preferred lenders" list, but the school's financial aid form allows the
borrower to select another lender, said President James E. Collins.
Jean Vander Wert, financial aid director at Central College, which has received
$51,000, said the reimbursements don't come close to covering her office's
expenses.
Vander Wert also pointed out that the federal government pays colleges a 5
percent administrative cost allowance for handling some of its financial aid
programs.
Other college officials said they don't believe federal reimbursements are
comparable to Iowa Student Loan's reimbursements. For example, with Perkins
loans, colleges act as the banker and have tasks to perform throughout the term
of the loan. And the government, unlike a private lender, is not trying to seek any
advantage.
UNI, U of I explain why they say no
The University of Iowa, the University of Northern Iowa, Des Moines University
and Southwestern Community College have never accepted reimbursements
from Iowa Student Loan. Drake University, Coe College and Waldorf College, like
ISU, have stopped taking the money.
"It just doesn't feel right," said Joyce Morrow, associate director of UNI's financial
aid and admissions services. "It feels like we're in the back pocket of a lender,
and we just don't want to be in that situation."
Morrow said that instead of reimbursing colleges, Iowa Student Loan should
reduce its origination fees, which are the upfront fees students pay when they
take out a loan, and its interest rates.
The U of I has always declined the reimbursements "because we always want to
be in a position to assure students that all of our decisions about financial aid
programs are made in their best interest," spokesman Steve Parrott said.
Drake processes so many loans from so many providers that it doesn't need to
be reimbursed for "a very small portion of the costs that we're incurring anyway,"
President David Maxwell said.
Des Moines University's financial aid staff "did not feel comfortable" with the
reimbursement idea, said President Terry Branstad, a former Iowa governor.
State Sen. Jeff Danielson, a Democrat from Cedar Falls who has been
researching the college loan industry in Iowa and nationally for months, said,
"The more I learn about this issue, the less I like."
He added: "It's time to put the student back in the phrase 'student loan.' The folks
involved in these transactions should be an advocate for the student by getting
them the best deal, period."
Iowa Student Loan would welcome guidance from legislators and clarification on
rules, said Jamie Buelt, a public relations consultant hired to speak on behalf of
the organization.
McCullough, the CEO, said, "Iowa Student Loan's board of directors periodically
re-evaluates this cost reimbursement program, and will be doing so again in the
near future."
Concern: PLUS loans growing slower
Several private college presidents said the spike in the number of Iowa Student
Loan's private loans in recent years is not because of the reimbursements or the
way loan options are presented, but because of low interest rates.
Morningside College's director of student financial planning, Karen Gagnon, said
Iowa Student Loan's private loans are popular with students and families
because of competitive interest rates, and because the rates are made available
before the borrower applies for the loan, instead of after.
Iowa Student Loan also offers lower processing fees than many private lenders,
and offers students loans without a co-signer.
But private loans should be a last resort, said Michelle Durand-Adams, a board
member for the Iowa College Student Aid Commission, a state agency that has
some oversight over Iowa Student Loan.
Once students have maxed out all the federal loans they can get, they have two
options: their parents, regardless of income, can take out a federal loan, or the
student can take out a private loan.
The better choice is a federal loan, Durand-Adams said.
Federal loans have certain safeguards - they're forgiven if the student ends up
unable to work because of a disability or has serious financial trouble.
Private loans, including those loans through Iowa Student Loan, typically don't
disappear even if the student is disabled, declares bankruptcy or dies. The debt
becomes the responsibility of a relative.
Both Janet Adams, chairwoman of the aid commission's board, and DurandAdams said they're disturbed by the aid commission's study that shows that
federal college loans for parents, called PLUS loans, are exploding in popularity
in almost every state but Iowa.
Between 1995 and 2006, the number of loans nearly doubled in Iowa, but
quintupled nationally. In Minnesota, the 2006 volume was nearly six times the
1995 volume, and in Missouri, it was nearly 11 times the volume.
Financial aid staff said some Iowans like Iowa Student Loan's version of the
parent loan better because repayment can wait until after graduation, unlike the
parent loan from the federal government.
Iowa Student Loan's private loan volume more than doubled, to $973 million,
from 2003 to 2006, its financial statements show. Comparable data on the use of
private loans across the country were not available.
The statewide average debt for class of 2005 seniors graduating from public
universities is highest in Iowa, at $23,198, and second-highest for all four-year
schools, according to the Project on Student Debt.
McCullough said that's because of above-average increases in Iowa college
prices, stagnant financial aid, high college participation levels, and relatively low
family incomes - not because of how its Partnership loans are marketed.
McCullough said Iowans are fortunate that its loans exist to fill the financial gap.
On Thursday, New York's attorney general said his office issued subpoenas to
alumni groups working with Nebraska-based lender Nelnet, a competitor of Iowa
Student Loan. Cuomo wants to know if the alumni groups that endorsed the
lender received any benefit or payments.
Although ISU no longer accepts reimbursements, the Iowa State University
Alumni Association has accepted $176,000 in royalties and sponsorships since
2003 for allowing Iowa Student Loan to market its consolidation loans via the
alumni group's member magazine, Web site and direct mailing list, said
association President Jeff Johnson.
It's uncertain what other Iowa groups have relationships with Iowa Student Loan.
Although Iowa Student Loan freely shared many documents with the Register, it
declined to disclose its full list of college and association "partners," or the
amount of money it has paid each of them.
The private nonprofit organization, created by the state in 1979 and whose board
members are appointed by the governor, is not subject to Iowa's open records
and open meetings laws.
Get the lowdown on student loans
FEDERAL LOANS (Such as the Perkins, Stafford and PLUS loans): Considered
the safest place to start. Interest rates on federal loans don't change over time
and aren't affected by your credit rating. These types of loans come with
protections in case you become unemployed or have other problems after
college.
PRIVATE LOANS: Riskier and should be considered a last resort, some experts
say. Even if they start at a low rate, those with a variable rate can shoot up at any
time. Also, debt from private loans can stick with you forever - even if you declare
bankruptcy or become disabled.
PERKINS LOAN: Interest charged on this loan is 5 percent for both
undergraduate and graduate students; payment is owed to the school that made
the loan. $4,000 maximum for undergraduate students; $6,000 maximum for
graduate and professional students; no minimum award amount.
SUBSIDIZED STAFFORD LOAN: U.S. Department of Education pays interest
while borrower is in school and during grace and deferment periods; you must be
at least a half-time student. $2,625 to $8,500, depending on year in school. The
interest rate is no more than 6.8 percent.
UNSUBSIDIZED STAFFORD LOAN: Borrower is responsible for interest during
life of the loan; you must be at least a half-time student; financial need is not a
requirement. $2,625 to $18,500, depending on year in school. Interest builds up
while you're in school, but you don't have to start making payments until six
months after you graduate, and you still get the federal borrower protections. The
interest rate is fixed at no more than 6.8 percent.
PLUS LOANS: Available to parents of dependent undergraduate students who
are enrolled at least half time. Maximum amount is cost of attendance minus any
other financial aid the student receives; no minimum award amount. These
federal loans are only for parents and graduate students, and have a higher
interest rate of up to 8.5 percent, but they are generally a better deal than private
loans.
PRIVATE LOANS: Iowa students can choose from hundreds of lenders for a
private loan, including Iowa Student Loan.
SOURCES: Project on Student Debt at www.TICAS.org and
www.studentaid.ed.gov