Public confidence in college financial aid offices has been shattered by revelations of gifts, trips, deals, and kickbacks from lenders. In the resulting confusion, I have been asked time and again: "Is there a web site you can recommend where students can get accurate, complete and unbiased comparisons of student loan rates?"

Unfortunately, the answer is no.

The sites we have seen take money from lenders in exchange for getting listed. Often, lenders pay a premium to get prominent placement in the user’s search results. In some cases, "comparison" sites actually lead to only one or two lenders out of the thousands in the market. Even on sites that feature multiple lenders, it is perilously easy to be led down the wrong road, ending up with higher-cost loans that do not carry the interest caps and other protections that come with federal loans.

I recently logged into SimpleTuition.com to see what loan offers I could get if I decided to pursue my MBA at U.C. Berkeley. The lowest rate on the list (showing up on page 2) was 7.27% for a private loan from a company called Student Funding Group LLC. The price-conscious and time-constrained consumer, having found the best deal, might click on the "apply now" button and end the comparison shopping. Instead, I opened the expanded version of the search results, which revealed that the 7.27% is the "as low as" rate. It’s not a sure thing until I submit a complete application and allow the lender to peruse my credit reports.

Still, I had reason to be optimistic. MyFICO.com said my credit is so good that "Most lenders will consider offering you their most attractive and most competitive rates" and may even offer me "special incentives and rewards targeted to their 'best' customers." I should be a slam-dunk for that as-low-as rate of 7.27%, I thought. I proceeded through the application process (no, it didn’t take only a minute, as advertised) and eventually got a rate quote: 8.75% plus 4% in fees, or the equivalent of between 9 to 10% -- much more than the 7.27% that at first appeared possible.

Many (maybe most) consumers, after filling out that whole application, would go ahead and take the loan even at the higher rate, assuming there was some good reason they can’t get the as-low-as rate. But I decided to compare. A second lender, Sun Trust, had showed up on SimpleTuition with an as-low-as rate of 7.28%. After submitting, again, a whole application, I received a rate quote of 7.875%. It was much closer to the as-low-as rate, though there was no indication as to whether there would be any fees charged. I inquired via email, and it appeared that there would be no fees applied in my case.

Had I found the best loan for me? No, not even close. It turns out that SimpleTuition neglected to tell me about Federal Stafford loans, with rates of no more than 6.8%. And while the list included Federal Grad-Plus loans, I ignored them because the interest rate of 7.92% was higher than the rates I saw on listed private loans. Or so I thought. The important detail that I missed—because it’s not clear on the web site—was that the Grad-Plus loan rates are fixed, not variable like the private loans. That's a critical and potentially expensive distinction.

Not all lenders try to push private loans ahead of Federal loans. For example, Wachovia strongly encourages students to get Federal loans before considering private loans. Contrast that with the treatment you get when seeking a student loan through LendingTree.com. The site directs you immediately to a private loan company. And if you express an interest in Federal loans instead of their more expensive private loan, you are told with an ominous lack of enthusiasm: "Federal Loans may be a good option for some families." In fact, Federal loans are the best place to start for nearly everyone.

But wait! The lender list at GreentreeGazette.com shows that National City has private loans with zero interest. I applied. The promissory note arrived and I prepared to provide my electronic signature and get my loan. But I noticed that it said that my interest rate "margin" would be 4.25. I perused the rest of the document and found that the interest rate would be LIBOR plus the margin, which totals almost 10%. Plus 4% in fees. Another bad lead.

The system is confusing enough without the added problem of colleges' advice being potentially tainted by conflicts of interest. Students in the lending maze need unbiased, knowledgeable advisors. That's the important role that college financial aid administrators should be playing in the process.

Posted by bob shireman at 8:32 AM | Permalink

On April 1, the U.S. Department of Education released the FAFSA4caster, an online tool intended to help families plan for college by providing early estimates of their federal financial aid eligibility. To get an early aid estimate, students and their parents have to answer 96 questions from the actual FAFSA.

Positives: For students and parents who are not put off by the volume and complexity of questions in the FAFSA4caster, it will be a useful tool. It can give them a good sense of what they will be expected to pay towards college costs and what federal aid they may be eligible for. In addition, the data they enter will be used to pre-populate many elements of the full FAFSA when they are ready to officially apply for aid. This is a good use of technology that will allow aid applicants to pick up where they left off, rather than starting from scratch.

Negatives: The FAFSA4caster requires students and parents to answer all of the most difficult and error-prone income questions that make the actual FAFSA so intimidating. You still have to track down all the tax documents, make various calculations, and transfer the answers from one form to another by hand.

Suggestion: The way to make this tool easy and inviting is to significantly reduce the number of high-stakes questions that applicants have to answer themselves. That can be accomplished -- without diminishing the accuracy of the aid estimate -- by letting users authorize the IRS to answer 31 of the questions automatically. We encourage the Department to take this opportunity to simplify the FAFSA4Caster as soon as possible. Because the estimate it produces is non-binding, the Department could use whatever year of income data is available from the IRS at the time students and parents use the new tool. For more about how this approach could make the whole aid application process easier, see Going to the Source: A Practical Way to Simplify the FAFSA.

FYI: To get a sense of how hard it is to create a simple aid estimation tool given the income data that applicants are currently required to provide themselves, see these valiant attempts by FinAid! and the College Board.

Posted by Edie Irons at 4:41 PM | Permalink