Wisely Choosing a Financial Aid Lender

Editor's Note: Samantha Kahn, a financial aid expert who has worked in a variety of institutional settings, has written today's post.

If you're thinking about attending college in the fall, you're probably also thinking about how to pay for it. In the midst of those decisions, it has recently been discovered that some colleges and financial aid officers have had improper links with certain lenders, which has resulted in a lack of choice for students. Unfortunately the coverage has been presented in such a way that all colleges and all financial aid officers are under suspicion.

There are two federal loan programs, the Stafford Loan Program and the Direct Loan Program. The simple difference is that the funds come from different sources. Loan limits and deferment benefits are the same with repayment options differing slightly. If a college is in the Stafford Loan program, you choose your lender. Many schools have used lender lists for informational purposes, and these lists are not intended to limit your choice.

All of the colleges I've worked for used the Stafford loan program and had lender lists, with seven to 22 lenders on it. The list at each of these schools was actually a chart, with the name and contact information of each lender, the loan servicing company (sometimes but not usually the same company that originates the loans) and their contact information, the interest rate and origination fee (set by the US Dept. of Education and the same across the board), and the borrower benefits and conditions. I have never worked in a school that insisted students use a lender on the list.

Borrowers should examine the borrower benefits and conditions, though I've always thought that it was good to know if the originating company would also service the loan. The borrower benefits generally have included an X% reduction on the interest rate you pay if you make Y number of on-time payments, or a refund of all or part of the origination fee. For example, one lender may offer a bigger reduction than another, but the on-time payment period is 48 months instead of 36.

I've worked with students and parents who have reviewed the terms offered by each lender; people who have chosen a lender because a friend chose that lender; people who borrowed from the bank at which they have a checking account or other loans (like mortgages or car loans - be aware that a branch employee will most likely refer you to an 800 number if you have questions about a student or PLUS loan); and even students who have chosen a lender by figuratively throwing a dart at the list.

Obviously, I think it is best to do the research and determine which lender offers the best terms for your needs (or what you think may be your needs when you finish school). In the unlikely event that the college you are attending has been involved in improper conduct with lenders, you'll be protecting yourself from that as well as from signing papers you haven't read, which you know you should never do. Understanding the terms is difficult, particularly if you've never borrowed a loan before, and any financial aid officer should be willing to explain what certain terms mean. Be an informed borrower - it's the best way to protect yourself from any surprises.