House Reintroduces Bill Calling for Full Certification of Private Student Loans

A House bill reintroduced this week by Rep. Jared Polis (D-CO) would amend both the Higher Education Act and the Truth in Lending Act to strengthen requirements surrounding private education loans and to correct some technical flaws in the definition of private loans. The bill was first introduced in the 112th Congress and is considered a companion bill to the Senate version of the Know Before You Owe Act, introduced by Sens. Richard Durbin (D-IL) and Tom Harkin (D-IA). The House and Senate versions contain identical legislative language.

Concerned that many students who take on private loan debt do not have full information about more advantageous federal aid, the bill would require full certification by schools of private education loans, a step long advocated by NASFAA and other higher education groups. Instead of the current student self-certification, the Know Before You Owe Act of 2013 would require lenders to obtain the following information from the institution directly:

  • The student’s enrollment status and cost of attendance; and
  • The difference between the student’s cost and estimated financial assistance

The school would have 15 business days to provide either the certification or notification that it has received the certification request but needs additional time to comply. If the school fails to complete either of those actions within the allotted timeline, the lender could issue funds to the student without the school certification but would have to report the loan to the Consumer Financial Protection Bureau (CFPB) and notify the school of the amount. The CFPB would be given authority to regulate this notification. It is NASFAA’s understanding that this provision is not intended to be punitive to the institution.

Before certifying a loan, and within the 15 business-day window, a school would have to determine whether the student has applied for and exhausted federal Title IV student aid, and inform the student accordingly. Within the same timeframe, the school would also have to provide the borrower with the following disclosures:

  • Availability of, and potential eligibility for, federal Title IV assistance, and the impact of a private education loan on Title IV and other financial assistance
  • Terms, conditions, interest rate and repayment options of federal student loans
  • The borrower’s ability to select a private educational loan lender of the borrower’s choice
  • The borrower’s right to accept or reject a private education loan within 30 days following the lender’s approval of the loan, and a borrower’s 3-day right to cancel

The CFPB would be given authority to collect information about private student loans from lenders in annual reports. The information required would be determined by the CFPB in consultation with the Department of Education (ED).

Private lenders would also have to provide quarterly loan statements to borrowers while the student is enrolled. The statements would have to show remaining debt owed the lender, any debt increases, and the current interest rate for each loan. 

Under this bill the Truth in Lending Act would be amended to exclude federal loans under Titles VII and VIII of the Public Health Service Act from the definition of private education loan. (Title IV loans are already excluded. Institutional loans are regarded as private loans.) 

The bill would direct the CFPB to issue regulations within one year of enactment, to become effective within 6 months of issuance. Within two years of the issuance of regulations, the CFPB and ED would have to report jointly to Congress on (1) compliance by both institutions and lenders, and (2) the degree to which specific institutions utilize certifications in effectively encouraging the exhaustion of Federal student loan eligibility and lowering student private education loan debt.

NASFAA has historically supported the full certification of private student loans and endorses this bill. “The financial aid community stands behind The Know Before You Owe Act, which takes the important step of requiring full institutional certification of all private student loans, just as is currently required on all federal student loans. Private student loans often lack important consumer safeguards like the income-based repayment options and guaranteed deferments of federal student loans. This bill will allow aid administrators to provide better counseling on debt management by giving schools a fuller picture of students’ financing options," said NASFAA President Justin Draeger. “The Act also excludes federal student loans from Health and Human Services from the definition of a "private education loan,” providing a much-needed fix to a legislative provision that has caused confusion to student borrowers for years. NASFAA urges Congress to support this legislation.”

8 Comments

  • The only non-school certified loans are Bar Study and Residency/Relocation loans. How is this still an issue?

  • This will add more work to financial aid administrators. We already send three reminders to students and their parents on how to apply for federal student aid. This would be the fourth one! The private loan lenders should send the information out.

  • Many students are telling me that their private student loans are a better deal than the Plus loan. But it still doesn't make sense to take a private student loan without first exhausting the Stafford.

  • Increased administrative burden and a tight 15 day window are two things that jump out to me here. Are there really that many non-school certified loans out there anymore?

  • I am all for a mandatory school certification. I am tired of students on the evening news complaining about their student loan debt. Many students want the financial aid process to be like department store instant credit. Very few students and parents approach financial aid with a willingness to learn and fully evaluate their financing options and the realities of future debt. I also vote to have personal financial management a graduation requirement for high school students. In addition, returning adult students should also be required to take a personal financial management course. I find that too often students select a lifestyle and then expect their poor financial choices to line up with their fantasy lifestyle. When this doesn't happen, the cry is that college is too expensive.

  • I have more a question: If the FA office deterimes FA opportunities are NOT exhausted, will the FAO be bound to commit Campus Based and state grant funds to the student should they want to take advantage of the opportunity. If so, won't that deny other students a chance at those funds solely because someone else applied for a private loan and now are specifically alerted to FA opportunities while other students are not given the same information? I like the ideal of alerting the student of the loan situation before them. I also see a potiential situation FAO may find themselves. Or am mis-understanding this portion of the proposal

  • I agree all loans should have to be certified by the school.

  • The question that needs to be asked is, why NOT do this? I always call students who don't have Title IV aid, and suggest they borrow Federal loans first. Federal loans almost always have a better interest rate than a private student loan. I also look at the borrower request amount and the student's bill, and encourage them to borrow just enough to cover their balance. A lot of students don't fully understand or realize how quickly loan debt can add up. The more we can do to make borrowers aware of their borrowing, the better we are doing our job.

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