Preferred warnings

New York Attorney General Andrew Cuomo announced Thursday that he has uncovered some grift in the financial-aid industry. Apparently, student-loan companies have been offering financial rewards for colleges and universities that encourage students to choose their services.\nCuomo sent a letter to the presidents of 400 American colleges and universities warning them “to end or fully disclose potential conflicts of interests” with private loan companies, according to a news release. Cuomo has not specified which institutions were on the list, so I can only hope IU was exempt.\nAmong the transgressions Cuomo uncovered in his five-month investigation were schools creating “preferred lender lists”; lending companies sharing a percentage of profits with a university based on the number of its students who choose their company; and universities generally making it a pain to get a loan from a nonpreferred company, even if it has better rates.\nThis sounds awful, but keep your senses of perspective before you decry the “evils of capitalism” (I’m looking at you, COAS grad students). Loan companies are being a bit overzealous, but they can’t really help it – they’re capitalists.\nSchools should know better. It’s shameful to hear that a university might compromise the financial well-being of its students for a kickback.\nThe lending industry is in business to make money. It’s easy to become focused on this and lose track of certain ethical standards.\nAfter all, other industries offer similar rewards. Doctor’s offices may give patients free check-ups for referring their friends to their practice. And life-insurance companies offer school districts huge discounts to have all its employees on the same plan. So it’s easy to picture the “Acme Loans” staff meeting that came up with this new ploy:\nBoss: People, the market of loan-seeking students is expanding, and so is our competition. We need to keep up. Any ideas?\nSam: Lower interest rates?\nBoss: No way. Lower rates means less profit and smaller dividends, and my stock options are back-dated enough as it is. Next.\nSandy: Why don’t we just pay the schools to tell students to choose us? They’ll think it’s mandatory, like textbooks, on-campus living and meal plans!\nBoss: Great work, Sandy. Sam, you’re fired. Sandy, take Sam’s office.\nTo “Acme Loans,” here’s a free lesson on ethics (and you don’t even have to pay me back):\nStudents place a higher level of trust in universities. We’re trusting them to teach us about the world, and since they’re nonprofit, we trust they have our best interests at heart. Establishing your company as a preferred lender violates that trust.\nThis “unholy alliance,” as Cuomo called it, impedes the fair-market competition that would lead to better loan rates and terms. It’s like a politician taking a bribe, or a doctor prescribing a certain medication simply because he went to lunch with the sales representative (incidentally, that’s a whole other scandal). \nStudents need to learn to shop around, and colleges need to help them do so. Lenders must stop offering kickbacks, and colleges must to refuse to accept them.