Private loan system redone
Chris Coplan - February 28th, 2008Federal legislation has recently passed that enables students to become better consumers when taking out private student loans.
The College Opportunity and Affordability Act, introduced on Feb. 6, was voted through the U.S. House of Representatives on Feb. 7 by a vote of 354-58. Much like past legislation, this bill aims to make college education affordable and accessible.
Unlike other bills, HR 4137 would create a “Consumer’s Bill Of Rights” and effectively change the way students and private loan companies do business.
“The borrower protections in this legislation really add up to a College Consumer’s Bill of Rights,” said Rep. George Miller, D-Calif., the bill’s sponsor and chairman of the Committee on Education and Labor, in an e-mail statement. “The Bill of Rights will make the college loan programs work in the best interests of students and families again.”
The Consumer’s Bill of Rights is made up of 10 bullet points addressing numerous issues related to private student loans, often called alternative loans, and loaned to students from private banks.
Of the 10 guaranteed rights, they include protecting borrowers from “deceptive marketing campaigns” and informing families and students of rates and fees before the loan is made official.
The need for such consumer protection comes after several pressing issues impacting students, families and universities.
Robyn Nebrich, organizing director for the Arizona Students’ Association, said a primary reason the bill was created was to address the of ten unethical relationships between universities and private loan companies.
“In other states you had universities doing some pretty underhanded things,” Nebrich said. “You had people being flown to the Caribbean or student financial aid questions were being outsourced to the loan companies.”
Other issues came about from what Rebecca Thompson, the legislative director for the United States Student Association, calls an ever-increasing problem with money.
“Each year, there is more of a gap between financial aid and scholarships and the growing need for money,” Thompson said.
This often forces students to take out loans. When this occurs, students are often left with higher interest rates and fees.
“While all federal student loans are capped at an interest rate of 6.8 percent, interest rates on some private student loans have climbed as high as 19 percent,” said Rachel Racusen, the deputy communications director for the Committee on Education and Labor.
Besides interest rates, Luke Swarthout, the Washington, D.C. higher education advocate for the Arizona Public Interest Research Group, said upwards of 10-12 percent fees can be added onto the already soaring interest rates.
Students unable to limit themselves can also be part of the problem. With commercials promising a fast $40,000 loan with minimal effort, Thompson said students can take out entirely too much money and need to be better lenders by doing research on loans and the legally-binding promises that are included.
Despite praise for the bill, there have been critiques the bill does not completely assist students in loan management and dealing with life after graduation.
Swarthout said the bill does address two key issues: helping students be aware to not take out more money than needed and teaching students to shop around for better “apples to apples” comparisons. However, Swarthout said the bill still neglects the potential for hardships leading to bankruptcy.
“The bill doesn’t address how the basic loan terms can be risky,” Swarthout said. “If students hit serious financial trouble there is no recourse for them. No path for them to get their life back together.”
Because of the lack of absolute protection, Thompson said students need to exhaust every single potential federal loan or scholarship they can find before turning to private loans.
While having the potential to change the entire private loan lending business, Sallie Mae, one of the country’s leading private lenders, released a statement praising the Consumer’s Bill of Rights.
“The proposal to require school certification of all private education loans builds on Sallie Mae’s industry-leading practices to prevent over-borrowing and ensure students are borrowing wisely,” the statement said.
Eventually, both bills from the House and Senate will be reconciled and signed into law.
Until then, Racusen said it is the work of students to alleviate post-college debt that led this bill to be passed.
“This bill has strong support from college students,” Racusen said. “And their voices were a critical part of our efforts to put this legislation together.”
It is student leadership like ASNAU that appreciates national college affordability change, but find more work still to be done.
Kathleen Templin, a freshman political science major and a member of the ASA board of directors, said not dealing with the debt often produced by private loans can hurt the economy as a whole.
“Statistics show that 53 percent of students graduate in debt,” Templin said. “This not only affects the couple years following their graduation, but it affects long-term things such as being able to buy a house. Putting these students into the workforce with a huge debt load on their back is not good for the economy, and that burden needs to be reduced.”