Illegal Inducements

Lenders really want to be included on a college’s preferred lenders list. Doing so gives them an edge because many students use this list when choosing their lender. To make sure that the decision making process for inclusion on these lists is based on benefits to students and not external factors, there are federal rules to guide practices of colleges and lenders. However, lenders may sometimes engage in questionable, illegal activities to be included on the preferred lenders list. The main rules surround those of illegal inducements or prohibited inducements.

Colleges Cannot Discriminate Against Lenders

Colleges create preferred lenders lists to help students choose lenders. However, they cannot discriminate against any lender that a family might choose or require you to pick a lender on their preferred lenders list. And they cannot receive financial gain from the lenders placed on their preferred lenders list. As a student, you have the right to choose any lender you desire, regardless of their inclusion on your school’s preferred lenders list. Colleges may not have unreasonable delays in certifying a loan from a lender that is not on the preferred lender lists.

Illegal Inducements Rules

The Higher Education Act of 1965 has three separate definitions of illegal inducements for lenders, guarantee agencies and colleges and creates several rules, including:

The law prohibits the payment of "points, premiums, payments or other inducements". A lender cannot make payments to a school for favors.
The prohibitions apply regardless of whether the inducements are direct or indirect. Even if the inducements are not directly related to the loans, they may still be illegal.
The rules prohibit inducements to educational institutions, individuals, or other parties. More specifically, inducements to colleges and their employees are strictly prohibited.
The offering of an inducement in and of itself is prohibited, and not just the provision or payment of an inducement. So if a lender even offers an inducement but never pays, that’s still illegal.
Lenders are allowed to provide assistance to schools that is comparable to the assistance provided by the US Department of Education to schools.

There are many more rules regarding illegal inducements that apply specifically to lenders and to schools. For example, a lender cannot conduct unsolicited mailings to students of student loan application forms, except to students who have previously received loans from them. So if you receive unsolicited mailings, report that lender. Check with your school’s financial aid office to learn the best way to report fraudulent lenders. Also, lenders must not engage in fraudulent or misleading advertising practices.

There are rules for schools, too. Schools cannot secure funds for making loans. In short, schools cannot receive financial gain by endorsing particular lenders.

Examples of Illegal Inducements

The legal terminology regarding illegal inducements may be a little confusing. To make things a little more clear, below are a few examples of illegal inducements:

A lender employs a student at a school to act as the lender's just to persuade individual prospective borrowers to apply for a loan with the lender.
A lender's promotional activities include providing borrowers the chance to win prizes if they apply for loans.
A lender prints and distributes school brochures for a school at reduced cost, in order to induce the school to refer loan applicants to the lender.