Finance Friday: Private Student Loans Get Some Oversight


    As we saw last Friday, the U.S. government is currently passing legislation which will attempt to make the federal loan process easier, more transparent, and (hopefully) cheaper for student loan borrowers. In addition, Congress is expected to vote on a bill regulating the private (non-federal) educational loan market in the coming days. Students and parents often turn to private lenders--typically banks, but also institutions of higher learning--in order to finance the difference between the funding they can get from federal loans and the cost of tuition at their institution.

    How will this legislation affect those student borrowers?

    Inside Higher Ed discussed this bill way back in December of last year when the House of Representatives passed the original measure:

    The House of Representatives passed sweeping legislation on Saturday designed to toughen federal regulation of the finance industry, and the measure has significant implications for private student loans in two ways. First, it would ensure that all private student loans -- including those made directly to students by colleges and universities, for-profit and nonprofit alike -- would fall under the authority of the new Consumer Financial Protection Agency. Another provision in the legislation, sponsored by Rep. Jared Polis (D-Colo.), would require a lender providing a private student loan to certify with the prospective borrower's college that the student is eligible for the loan. The provision is designed to give colleges the opportunity to counsel borrowers to make sure they are aware of their other options.

    The legislation has now gone through various iterations, and the final version should go to a Congressional vote the week of June 28.

    What changes will this bill bring, and how will they help student borrowers?

    1. Greater oversight of private lenders. All private entities lending money to students (including banks, not-for-profit educational institutions, and for-profit colleges) will now come under the authority of the Consumer Financial Protection Bureau. "The legislation," says Inside Higher Ed, "would give the Consumer Financial Protection Bureau supervision over loans made by all non-banks, and by banks with more than $10 billion in assets." This is particularly good news for those accepting loans from for-profit colleges and educational institutions; although those loans were already covered by the Truth In Lending Act, they will now have a double mantle of protection with this new legislation, the Restoring American Financial Stability Act of 2010.
    2. Greater guidance. The legislation makes a provision for the appointment of a student loan ombudsman within the Consumer Financial Protection Bureau. This ombudsman will be in charge of providing guidance and information for students borrowing from non-federal sources, in addition to keeping an eye on issues and problems that may arise between students and lenders.

    There is one difference between the House and Senate version of the bill. According to Inside Higher Ed:

    The legislation stops short of one major change on which consumer advocates, financial aid officers and lenders had all agreed, which would have required a lender providing a private student loan to certify with the prospective borrower's college that the student is eligible for the loan. The provision, which was designed to give colleges the opportunity to counsel borrowers to make sure they are aware of their other options (notably the availability of lower-cost and lower-risk federally subsidized loans), was in the House-passed version of the legislation but did not win support from Senate negotiators.

    However, even without this certification, this new legislation will go a long way in providing students with a framework through which to borrow both from the federal government and private organizations. Although it may take a while for these new measures to be enacted, it is hoped that in the long run they will prove beneficial to new and old borrowers alike.

    WHAT DO YOU THINK: Will these new measures make it easier to regulate loans and interest rates? Will this new ombudsman position prove beneficial? Would you use their services? Give us your take in the comments below.

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