Crazy College Collusion Cover-Up

Attorney General of New York Andrew Cuomo is accusing U.S. colleges and student loan lenders of collusion in the market for student loans. Cuomo alleges that schools are giving anticompetitive traits to the market through the questionable although not illegal arrangements that are developing between the two entities. This issue is one of great importance because approximately two-thirds of college students receive some type of student loan. The major issue raised is about the practicality and legality of having "preferred lender" arrangements between schools and lenders. In this situation, a student, having already selected a school of their choice, is then forced into a student loan market that is essentially a monopoly given the the preferred lender. In this case, the lender is able to price at virtually any price he wishes (above marginal cost) because there is essentially no option for the consumer to purchase another good in the form of a different college after their initial college choice has taken place. Although the legality of this preferred lender status has not yet been determined, Cuomo is alleging other activities involved in the collusive arrangements that could be considered illegal. This include kickbacks to colleges based on a percentage of the student loan agreement, expenses paid vacations to exotic locations for the lenders by the colleges, and funds/credit lines to schools who drop out of the direct federal loan program. This situation can also be seen as representing collusion inside the loan market between lenders. If all lenders are satisfied with a majority of their business coming from preferred lender status institutions at which they are allowed to price about the market price, there is then a great incentive to maintain this price on the market that does not include the preferred lender relationships. If the prices in both instances are the same, it would be hard to prove collusion between lenders in the "free" market for student loans when they are simply pricing the same in both markets. This instance is also a great example of how collusion of producers BETWEEN primary and secondary markets and not WITHIN markets can lead to situations that are anticompetitive.