NASFAA Private Student Loan Recommendations Adopted by CFPB
The Consumer Financial Protection Bureau (CFPB) issued private student loan policy recommendations that will be delivered to Congress and incorporate several policy changes advocated by NASFAA and the National Association of College and University Business Officers (NACUBO).
Specifically, the CFPB recommends:
- Allowing private student loans to be discharged in bankruptcy like other forms of consumer debt;
- Excluding Department of Health and Human Service (HHS) student loans from Truth in Lending Act (TILA) requirements for private student loans to help students and parents distinguish between federal and private loans;
- Requiring private student loans to be certified by the higher education institution;
- Setting up a database -- similar to the National Student Loan System (NSLDS) -- for private student loans to help students track and repay their loans.
"If enacted, these recommendations would help ensure students and parents receive counseling before borrowing private student loans, avoid confusing private loans with some federal loans, and provide them tools to better track and repay their loans," NASFAA President Justin Draeger said in a statement. "In addition, adopting these recommendations would give trapped borrowers a pathway back to prosperity for those who may find themselves trapped in a non-dischargable student loan abyss.We urge Congress to consider and enact these recommendations immediately."
Discharging Private Student Loans in Bankruptcy
NASFAA has been a long-time advocate of allowing private student loans to be discharged in bankruptcy. Current bankruptcy law treats private education loan debt differently than other consumer debt such as mortgage and credit card debt and the same as federal student loan debt, even though federal loans provide default protections like Income-Based Repayment. The law allows borrowers who demonstrate an undue hardship to have their loans discharged in bankruptcy, but the “undue hardship” clause offers little protection because it is not defined in law, making it subject to judicial review, tests, and precedent. Courts almost always apply a very strict interpretation of this provision leaving only 5 percent of borrowers with any chance of discharging their loans, according to the National Association of Consumer Bankruptcy Attorneys.
"Allowing the discharge of private student loan debt in bankruptcy is critical to ensuring fairness for American consumers and to provide a way for some struggling private student loan borrowers to establish financial stability," Draeger said in testimony submitted for a Senate hearing.
Targeting TILA Requirements to the Right Loans
Congress amended TILA as part of the Higher Education Opportunity Act (HEOA) to incorporate a definition of private education loan —a provision that excluded Title IV loans but neglected to exclude federal loans authorized under Title VII and VIII of the Public Health Service Act. As a result, HHS loans must be treated the same as private student loans, and only loans offered under Title IV of the Higher Education Act are exempt from private education loan requirements, including disclosures and the self-certification form. Therefore, an institution must comply with TILA requirements when it offers a student a Health Professions Loan, a Nursing Student Loan, a Loan for Disadvantaged Students, or a Primary Care Loan, even though they are federal loans and usually have better terms and conditions than private student loans.
This can make it difficult for students and families to distinguish Title VII and VIII loans from private student loans and ensure that they exhaust their federal student loan options before turning to private student loans.
Currently, students are required to self-certify information relating to their private education loans, but some students are able to borrow private loans without the school ever knowing. Establishing a school certification process, as is required for federal student loans, would help ensure schools can counsel students and parents before they borrow private student loans. Private loan school certification is supported by higher education institutions, student loan providers and student and consumer groups.
Private Student Loan Database
Students and parents can have trouble tracking their private student loans and the loan servicers. That's why NASFAA's Award Notification and Consumer Information Task Force recommended that the U.S. Department of Education should mandate that all educational loans from private lenders as well as from colleges and universities be reported to one, central database. This resource would help ensure that borrowers don't lose track of their loans, improve the ability of institutions to counsel students, and help control over borrowing.
Education Secretary Recommendations
The CFPB's private student loan report also includes recommendations from U.S. Education Secretary Arne Duncan, which largely mirror the CFPB's recommendations. Specifically, Duncan urges Congress to:
- Require institutions of higher education to determine whether a private education loan borrower has exhausted his or her eligibility for Federal student aid and to certify a borrower’s need for a private education loan before a private education lender issues the loan
- Require lender disclosures on the availability of Federal student aid
- Work with the CFPB and Department of Education to determine how to provide greater flexibility and/or relief to private student loan borrowers who are experiencing financial distress including potential changes to the treatment of private student loans in bankruptcy
- Amend the Definition of private education loan to exclude other federal loans
- Work with CFPB and the Department of Education to identify the necessary resources to provide a comprehensive picture of student borrowing that includes federal and private loans