The student-loan industry is under a cloud, hit by allegations that some firms have been paying college financial-aid personnel to steer business their way. The scandal is just the latest twist in what has become an increasingly complex and frustrating process for parents and students in their quest to find ways to fund pricey college educations.

The growing concern over student lending has produced new regulatory proposals aimed at reining in the increasingly sophisticated marketing efforts used by private lenders. It has also sparked calls for parents and students to be more vigilant in looking after their own interests in the financial-aid process.

Companion bills have been introduced in the U.S. Senate and House that aim to protect students and parents from exploitation by requiring more disclosure from lenders about the deals they craft with colleges and universities. The bills would encourage families to maximize their borrowing through the government's loan programs.

"Lenders are increasingly using questionable methods to persuade colleges to steer students to their loans," Sen. Edward Kennedy D.-Mass., wrote in an e-mail response to questions. "In return, the colleges give an unfair advantage to the lenders." A co-introducer of the Student Loan Sunshine Act in the Senate, Kennedy says that too many students don't exhaust their federal loan options, simply because they don't know what funds are available or how to obtain them.

"Students need to know that low-interest loans are available through the government's loan programs," he says. "Our goal under the Sunshine Act is to provide students with honest, straightforward, adequate information."

Lawmakers are reacting to a flurry of revelations about questionable activity in the student-loan business. In recent weeks, Andrew Cuomo, New York's attorney general, announced investigations of more than 100 schools regarding "questionable conflicts of interest."

Brand-name institutions such as New York University and the University of Pennsylvania have agreed to reimburse a total of more than $3 million to students with money they were paid by lenders for loan business. The NYU and University of Pennsylvania settlements cover their relationship with Citibank, by which the schools received payments from Citibank on the basis of loan volume. Citibank has agreed to commit $2 million to a new national fund for educating students and parents about the student-loan industry.

SLM Corp., commonly known as Sallie Mae and the nation's largest student lender, has also agreed to a settlement that includes, among other actions, adopting a code of conduct governing student lending and contributing $2 million to educating students about loans.

Full-service lenders

One of the most important actions that students and parents can take to protect themselves is to get a loan from an institution that has the infrastructure needed to service that loan, says Barmak Nassirian, an associate executive director with the American Association of Collegiate Registrars and Admissions Officers.

"You want to borrow from someone who has the infrastructure so that you know who's going to be servicing the loan," Nassirian says. "It doesn't make sense to go with entities that are not really in the student-lending business. You don't want your loans to go to the lower bidder."

Citibank and Sallie Mae are examples of full-service institutions, he says.

As college costs have increased in recent years, federal financial aid has not kept pace, and the private market has blossomed, says Robert Shireman, president and founder of the Institute for College Access & Success, an education research and advocacy nonprofit based in Berkeley, Calif. Consumers must look carefully at terms, he says, to avoid a loan that is "no better than a credit card."

"What we're seeing are these aggressive efforts to gain a piece of the overall student-loan market," Shireman says. "I'm concerned about colleges that portray private loans as part of a financial-aid offer or award and are not clear that those loans may have very high interest rates."

Early look at rates

He warns that consumers should look closely at the rates early in the application process.

"Often loan companies...are asserting the interest rate is the best rate. But once you get into the process, it's not until a few months later they give you the details —and by that time you've taken so many steps you feel it's inevitable and that's the loan you sign up for," he adds.

Also, consumers should look beyond the advertised payment amount, which can be misleading.

"Don't focus on the payment amount that's described by a lender because that payment amount may be based on assumptions of paying over 20 or 30 years," Shireman says.

With increasing activity by private lenders has come more direct-to-consumer marketing over the Internet and regular mail. Borrowers can get overwhelmed by the system and various offers, experts say.

That's why financial-aid administrators should still play a role, says Larry Zaglaniczny, director for congressional relations with the National Association of Student Financial Aid Administrators.

The group maintains that the overwhelming majority of financial-aid administrators have the best interest of their students at heart. "Regrettably, there have been a few individuals who have evidently betrayed trust," he says, "and there have been a number of others where there is an appearance of a conflict of interest. "

Zaglaniczny advises families to speak to multiple sources for reliable aid information.

"If you want to double check something, go right to the director of financial aid," he adds.

Copyright (c) 2007 MarketWatch, Inc.