Preferred lender lists are taking hits from all sides—and Sallie Mae is striking back.  Last week, the student loan giant responded to increased scrutiny from the media, Members of Congress, and the Department of Education with a letter decrying the attacks as "unwarranted" and "ill-conceived."

For non-regular readers of Higher Ed Watch, preferred lender lists are created by universities as a type of recommendation for students to choose particular lenders.  A very, very high proportion of students follow their college's recommendation.  In theory, the university chooses lenders that provide students with the best deal, and students don’t have to take the time to investigate different lender packages.

Why the brouhaha now over preferred lender lists? For students, they can pose a danger. Students might be funneled to lenders that aren’t necessarily in their best interest (but are in the university’s best interest).  Higher Ed Watch believes that MyRichUncle, for example, offers the nation's lowest federal student loan interest rate, but it appears on few preferred lender lists.  

But why would Sallie Mae so vigorously defend the preferred lender practice and attack those who simply want greater disclosure of what goes into university choices?

As the number one loan provider and loan holder in the country, Sallie Mae has been well served by preferred lender lists. And preferred lender lists certainly have received criticism lately.

First, we at Higher Ed Watch highlighted the problem with preferred lender lists in our event on Student Loan Scandals. Then, there was a New York Times muckraking article on Loan to Learn’s Caribbean junket offer to college officials that also highlighted maverick loan provider MyRichUncle’s attack on the preferred lender concept.

Then, Senators Edward Kennedy and Richard Durbin introduced The Student Loan Sunshine Act, which specifically targets preferred lender list arrangements for greater public scrutiny. The Kennedy-Durbin bill would require lenders and colleges to report publicly on the nature of university - preferred lender partnerships and disclose all gifts to university personnel valued at over $10.  Further, the bill would require colleges to identify a minimum of three preferred lenders from which students could choose.  But the bill does not ban the preferred lender practice.  It’s mainly a reporting bill.  (Disclosure: Higher Ed Watch staff used to work for Kennedy.)

Last week, the U.S. Department of Education hinted at plans to regulate preferred lender lists, independent of legislative action.  Being considered is requiring colleges to identify at least three preferred lenders.  And the Department promised to look more closely at: (1) colleges that allegedly are not processing student loans from banks not on the school's preferred lender list and (2) (illegal) lender inducements to colleges to get on those lists.

And so now Sallie Mae has reacted and is attempting to discredit the critics.  On one level, it’s simply Sallie Mae protecting their financial interests.  Preferred lender lists are a very valuable tool.  Sallie Mae wants to ensure that schools, by way of these endorsements, keep funneling students their way.

But really, what can Sallie Mae accomplish with its obsequious letter to financial aid officers other than open itself up to the same kind of criticism that befell Loan to Learn when it attempted to do the same? They aren’t really trying to stop the Department of Education from issuing regulations, because they can’t. Sallie Mae’s not going to win the hearts and minds of financial aid administrators with a letter.  Those folks know that Kennedy and Durbin are going after banks like Sallie Mae, not them.  They're not stupid.  And they love Ted Kennedy, who has been the nation's number one champion for increased student financial aid for years.  And besides, the Student Loan Sunshine Act is basically just a reporting bill. 

We suspect a more calculated reasoning on Sallie Mae's part.  Just maybe Sallie Mae is trying to spin Congress and the media by picking a fight in the area where their potential loss is minimized. "Let’s divert lawmaker’s attention towards preferred lender lists—we can afford reports that no one will read and three as opposed to one or two preferred lenders being identified."

What Sallie Mae can’t afford is to lose a fight over their inflated subsidy level or Direct Loan participation. Threats to their business model of a government guarantee against default and a large government subsidy on top of student interest payments are much more serious than requiring two or three preferred lenders to be identified at each college or university.  

For Sallie Mae, increased competition from the Direct Loan program, for example, as proposed in the bipartisan, bicameral Student Aid Reward Act (STAR), which Chairman Miller has said is a legislative priority, would be a major blow.  They would much rather have the Student Loan Sunshine Act become law than STAR. 

If Sallie Mae had better political advisors, they would develop a constructive alternative to the Student Loan Sunshine Act that would also increase competition within the FFEL program, but in a way that Sallie Mae would be likely to gain market share.  Instead, Sallie is engaged in a defensive battle over preferred lender lists, which they can only lose and which will only alienate Congressional sponsors in a position to do much greater harm to Sallie’s business model.

Keep it up Sallie Mae and you’ll get the Student Loan Sunshine Act and STAR.  Ted Kennedy and Dick Durbin are not the types to be scared by appeals to financial aid directors, and they know plenty about political spin.  More than you.

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