The Higher Education Opportunity Act (HEOA) includes several provisions that will affect how students, schools, and lenders work with private student loans. Title X of the HEOA, dubbed "The Private Student Loan Transparency and Improvement Act of 2008," makes changes to the Truth in Lending Act and the Higher Education Act. The new law requires lenders to obtain a certification form from prospective borrowers before originating a private student loan.
But unlike certifications required for Stafford and PLUS loans, private student loan certification is not signed by the school. Instead, the Secretary of Education will be required to develop a standard form that contains many of the same elements of Stafford and PLUS loan certification so students can self-certify a private loan with these forms.
Schools - not lenders - will be required to make these forms available to their students. These private loan certification forms will disclose to students that:
- Students may qualify for financial aid in place of private student loans
- Students should ask the financial aid office about the availability of federal, state, or institutional financial aid
- Private student loans could decrease a student's eligibility for financial aid
In addition, these forms must contain a place to provide students with the following data elements:
- Cost of attendance (COA) as defined for Title IV federal student aid purposes
- Expected family contribution (EFC) if a FAFSA was filed
- Estimated financial assistance (EFA)
- The difference between COA and EFA, and the sum of that difference plus EFC
After obtaining this form and applicable information from schools, students are then required to sign the form and turn it over to lenders. No school signature is required and lenders are only required to collect the form.
Wins for Students
In the months leading up to HEA reauthorization, NASFAA submitted a proposal that would have required each private loan to be certified by a school to confirm a student's enrollment status, inform the borrower of possible eligibility for other forms of financial aid, and ensure that the loan does not exceed the school's cost of attendance minus the student's estimated financial assistance.
NASFAA's proposal sought to ensure that students receive the maximum amount of federal student aid they are eligible for, before taking out private student loans. It also replicated current private educational loan school certification procedures performed routinely by many financial aid offices. The proposal would also have guaranteed that no private educational loan would exceed a borrower's cost of attendance.
While the new legislation does not require school certification, it does require students to obtain the same information that NASFAA originally proposed. The fact that the form is certified by the student seems toothless, but since the forms must be distributed by the school in written or electronic format, financial aid administrators can use the form as a way to discuss the pitfalls of private loans with students. Although the law requires schools to provide the form and the specified information to the student, it does not appear to require the school to complete any portion of the form. Conceivably schools could choose whether to provide the certification form with the required data elements already filled in or leave the data elements blank and allow borrowers to fill in those data elements after following up with the school.
Additionally, the law requires lenders to disclose to students the specific terms and conditions of their loan and their possible eligibility for other forms of financial aid, as well as the effect of the private loan on other aid. It also gives students several opportunities - including after disbursement - to back out of their private student loan without penalty. Finally, the law applies many of the same requirements governing preferred lender lists, serving on advisory boards, and co-branding as found in other areas of the HEA. These provisions ensure schools will avoid even the appearance of having any conflicts of interest.
Losses for Students
Private education lenders have no liability for failure to comply with the self-certification guidelines, according to the legislation. There are also no provisions prohibiting lenders from making loans in excess of students' need. And despite the legislation's best efforts, it does not appear it will have any major impact on sometimes harmful direct-to-consumer marketing tactics.
As found in other industries - most notably the mortgage industry - it is difficult to reign in DTC marketing through legislation and regulation. While the intent of the law was to bring more sunshine into the private student loan marketplace by mandating several new disclosures, forms, and data elements, it is conceivable that unscrupulous lenders could still skirt these mandates entirely by offering loans that are not exclusively "private education loans." Private education loans are defined in the law as loans not made under the HEA and are issued "expressly for postsecondary educational expenses to a borrower." Conceivably a lender could create a "personal development loan" or "childcare loan" with education components that would fall outside of these new provisions.
However, the overall effects of the private student loan provisions appear to be a positive first step. As NASFAA President & CEO Dr. Phil Day pointed out in a recent letter to members, while this measure is far from perfect, it does create important protections for student borrowers. "NASFAA supports the new law's requirement for school participation in a self-certification process for private student loan applications to ensure that students receive appropriate loan counseling and avoid unnecessary debt," Day wrote.
By Justin Draeger
NASFAA Associate Director for Communications
Posted 08/28/08 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.
