House Bill Calls for Full Certification of Private Loans
A House bill introduced 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 is considered a companion bill to the Senate version of the Know Before You Owe Act, introduced in late March 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 2012 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.
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.
It is unlikely that either the House or Senate version of the bill will see any movement before the election.