New Legislation Would Attempt to Protect Students from Unnecessary Debt

We have written plenty here at Higher Ed Watch about federal student loan programs. But increasingly, students are borrowing from private lenders to fund their educations, often at less-favorable terms than those for which they might otherwise be eligible. A new piece of legislation introduced in the Senate, the Know Before You Owe Private Student Loan Act (S. 2280), would help students avoid unnecessary or costly private borrowing.

The bill, introduced by Senators Dick Durbin (D-IL) and Tom Harkin (D-IA) late last month, would place added responsibility on colleges and universities and private lenders to help students avoid unnecessary (and generally more expensive) private loans and instead take advantage of federal loans. Private student loans often have variable interest rates (in some cases capped at 18 percent), and lack benefits that come standard with federal loans like deferment, forbearance, and income-based repayment.

The current rules are meant to inform borrowers that they could be eligible for more federal loans and may not have to take out private loans. Congress and the U.S. Department of Education put the regulations in place in 2010. They require only that students or borrowers “self-certify” – sign a form that indicates the student’s expected cost of attendance.

The Senate bill aims to bolster that process. Under the proposed legislation, private lenders would be required to obtain confirmation of students’ enrollment statuses and their costs of attendance (minus Pell Grant awards, other federal grants and loans, and institutional aid) from the institutions of higher education before making loans to students. (Presumably this would introduce a check against students over-borrowing unnecessarily.)

Lenders would then be required to provide quarterly updates to borrowers detailing the status of their loans. The letter would include the amount of interest the borrower had accrued but not paid off, information on growth in the student’s debt since the last quarterly statement was issued, and the current interest rate charged on the loan (most private student loans offer variable interest rates, like those on credit cards, rather than the fixed rates that come standard on federal loans). Private lenders would also be required to report information on their loans to the Consumer Financial Protection Bureau (CFPB). The specifics of that reporting would be set by the CFPB.

As for colleges and universities, they would have to confirm a student’s enrollment status and costs of attendance before the lender could make a loan, and they would be required to ensure students are familiar with federal loan options before taking out a private loan. In this role, institutions would have to check that the student had first applied for all available federal student aid, inform the student of any remaining federal options and how accepting a private loan could impact his eligibility for federal options in the future, and explain to the borrower that they can shop around among private lenders.

These consumer protections are particularly relevant given recent concerns about students taking on unmanageable debt loads. And as we’ve written on our sister blog Ed Money Watch, private loan borrowing occurs most at expensive for-profit schools, where student loan defaults are highest. What is more, fewer than half – only 46 percent – of private loan borrowers in undergraduate programs had exhausted their federal Stafford loan maximum, demonstrating that students are missing opportunities to borrow under the more-favorable federal terms available to them. 

In other words, students could benefit from more information about federal and private student loans. The Know Before You Owe Private Student Loan Act might just do the trick.