Controversy Over Student Loans Might Benefit L.A. Company

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Kickback deals and aggressive lending practices.


Sound familiar?


This time it’s not subprime mortgages but the controversy over student loan practices, where at some universities including USC officials have been found holding stock of lenders recommended to students.


It’s also a controversy that has not left All Student Loan Corp., the state’s largest non-profit student loan originator, unscathed though the Los Angeles lender contends it may end up with an even greater market share when all the dust has settled.


The student loan sector has been booming as government aid and scholarships haven’t kept pace with skyrocketing college tuition. The stakes are particularly high in Southern California where about $4 billion in new student loans are originated from private colleges and universities such as USC and the public University of California, California State University and junior college systems.


All Student currently has 82,000 borrowers in various stages of repayment from more than 100 colleges and universities statewide. It’s organized as a nonprofit, originates an annual average loan volume of $200 million and doesn’t sell its loans or service those originated by other lenders.


Last month, though, the corporation found itself lumped into the widening controversy over suspected collusion between lenders and universities after a Loyola Marymount University senior attending a compulsory student loan workshop complained.


The workshops are intended to educate students about their rights and responsibilities as borrowers, and also to alert them about possible pitfalls in consolidating their debt. However, the student said a representative from All Student asked them to fill out forms with personal information while “disparaging” other lenders’ practices in favor of All Student not exactly the strategy one would expect from a non-profit lender trying to help students pay their loans back after graduation.


Christopher Chapman, the president and chief executive of All Student Loan, called the Loyola episode “unfortunate” and maintains there’s a big difference between All Student and for-profit lenders such as Citibank.


Indeed, according to lending experts, All Student and similar non-profit lenders generally offer loans with lower interest rates because they are not focused on maintaining Wall Street-level profit margins. The lenders also have lower default levels than most private lenders, largely the result of the lower interest rates, along with loan leniency and forgiveness policies.


For instance, All Student has offered an interest rate cut of 1.25 points after 24 consecutive timely payments and considers payments “on-time” if they arrive within 15 days of a due date. Moreover, the lender is planning to launch a program forgiving $2,500 of debt for students who go into nursing programs.


“College costs are continuing to rise and loans are outpacing grants,” said Alexa Merrero, a spokesperson for the Education Finance Council, a trade group representing nonprofit student loan lenders. “Within that context you need organizations like All Student Loan to be free of suspicion.”


For now, all lenders are waiting to see what will happen in the wake of political fallout. Rep. George Miller, a Bay Area Democrat and chairman of the House Committee on Education and Labor, has asked the Federal Trade Commission to investigate marketing practices by student loan companies.


All Student is not on the list of lenders who Miller is targeting and Merrero hopes that the “pr backlash” and government reforms don’t hurt nonprofit lenders.

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