New Regulations on Preferred Lenders and Inducements

The U.S. Department of Education has drafted a package of proposed regulatory changes that, among other things, would keep colleges from recommending fewer than 3 lenders to students who are seeking federal loans.

Along with requiring colleges to include at least 3 lenders in their "preferred lender" lists, the proposed changes would require colleges to show the "method and criteria" they used to pick the lenders, and to give borrowers interest rate information and benefits offered by those lenders.

It would also clarify what lenders can and can't offer colleges and prospective borrowers to secure loan applications or loan volume. Listed among the "prohibited inducements": other financial aid; prizes; payment of conference or training registration, transportation, and lodging costs; hospitality suites; tickets to shows or sporting events; and meals and alcoholic beverages.

The proposed changes show the Education Department's growing concern that some colleges are violating federal law by making students borrow from lenders with which the institutions have exclusive arrangements.