Mixed Signals from Congress Lead to Misguided Proposals on Private Loans

By Ben Miller and Stephen Burd

The Federal Reserve Board has proposed regulations that could significantly weaken a federal law that aims to protect students from being misled into taking out high cost private student loans. In a notice in the Federal Register on March 24, the agency said that it is considering including exemptions, or “safe harbors,” to a provision Congress added to the Higher Education Act last year that prohibits lenders from using a college’s name, mascot, logo, or emblem to market private loans to students.

Under the Federal Reserve’s proposal, a lender would be able to continue engaging in these practices as long as it disclosed “in a clear and prominent way” that the college it is referring to “does not endorse the creditor’s loans, and that the creditor is not affiliated with the educational institution.” The agency says that this “safe harbor approach” is needed because a lender “may at times have legitimate reasons for using the name of a covered educational institution” in its marketing materials.

The Federal Reserve also proposes widening this exemption even further for private student loan providers that appear on a college’s preferred lender list. In those cases, the agency says, it “would be misleading” for a lender to state that a school has not endorsed its loan products. Instead, it would simply require that the lender “clearly and conspicuously disclose that the loan is not being offered or made by the educational institution.”

At Higher Ed Watch, we believe that these proposals would completely undermine both the letter of the law and its intent. But we don’t believe that the fault for offering these misguided proposals rests entirely with the Federal Reserve. Congress is also to blame for sending mixed signals to the agency about how this provision should be enacted.

The language that Congress included in the Higher Education Act reauthorization legislation it approved last year is absolutely unequivocal in prohibiting co-branding. It reads:

“A private educational lender may not use the name, emblem, mascot, or logo of the covered educational institution, or other words, pictures, or symbols readily identified with the covered educational institution, in the marketing of private education loans in any way that implies that the covered educational institution endorses the private education loans offered by the private educational lender.”

However, in report language accompanying the final bill, the legislation’s authors appear to back away from the blanket prohibit. They suggest that lenders could comply with this provision simply “by including a clear prominent and conspicuous disclaimer that the use of the name, emblem, mascot, or logo” of a college “in no way implies endorsement by the covered educational institution of the lender’s private education loans.” In the Federal Register notice, the Federal Reserve specifically cites the report language to explain its justification for its proposals.

While we understand that the conferees muddied the waters with their explanation of the provision, we believe that the Federal Reserve should be obligated to abide by the letter of the law rather than by the explanatory statement in the conference report. We also believe that the proposal to exempt loan providers that are recommended by colleges to their students is a direct violation of law, which clearly prohibits colleges that have entered “a preferred lender arrangement with a lender” from allowing that loan provider to use its “name, emblem, mascot or logo” in the marketing materials it provides students. The conference report is silent on this provision.

A bright-line prohibition is absolutely needed because as we’ve seen over the last several years, the use of co-branding can lead to significant confusion among students who may believe that a loan from a private creditor is actually endorsed, if not disbursed, by their schools. This lack of clear understanding can influence borrowing decisions, leading students to take out loans they may not have otherwise considered. Given that private loans carry very high interest rates and are extremely difficult to discharge in bankruptcy, it is absolutely essential that borrowers are fully informed about the type of debt they are taking on.

If co-branding is still occurring, the types of disclosures that the Federal Reserve proposes would not bring sufficient clarity to students. In most other types of marketing, there is a clear understanding that the appearance of an individual or symbol on a product or as part of a commercial is an endorsement on their part. Students will generally make the same assumption when assessing private loan marketing materials. In other words, they may focus more on a symbol that appears to imply endorsement than on a disclosure that says it does not.

As a result of all the controversy surrounding co-branding, many lenders, including loan giant Sallie Mae, have stopped or at least scaled back their engagement in these types of activities. If the Federal Reserve’s proposals are enacted, we fear that loan providers will revert to form, leaving students as confused as ever. Surely that’s not what Congress intended when it approved legislation containing this vital provision.