Federal student loans have fixed interest rates, manageable repayment options and several consumer protections that private student loans lack
WASHINGTON, D.C.–(ENEWSPF)–March 29, 2012. Noting that two-thirds of private student loan borrowers were not aware of the dramatic difference between federal student loans and risky, higher-interest, private student loans, U.S. Senators Dick Durbin (D-IL) and Tom Harkin (D-IA) today introduced a bill that would require schools to counsel students before they sign on to expensive, even unnecessary, private student loan debt and inform them if they have any untapped federal loan eligibility. In many instances students have not applied for federal aid before they apply for private student loans or have not exhausted their federal aid options.
The Know Before You Owe Act of 2012 would also require the prospective borrower’s school to confirm the student’s enrollment status, cost of attendance and estimated federal financial aid assistance before the private student loan is approved.
“There is no doubt that federal loans are a better deal for American students and families,” said Durbin. “However, with many for-profit colleges pressuring students into private student loans, many students and their families are not informed of the difference. Private student loans with higher interest rates, less flexibility and few consumer protections can burden students from graduation to the grave, ruining their credit and stopping them from borrowing for a home. The Know Before You Owe Act which I am introducing today with Chairman Harkin would empower students and their families to exhaust their federal financial aid options, which are designed to be more reasonable before being forced into private loans.”
“With student loan debt at a record level, we must empower students to make informed decisions about how they finance their education, especially when it comes to the risks of private loans, which can sink students into financial quicksand and are not dischargeable in bankruptcy,” said Harkin. “This bill will help lower default rates and curb unnecessary debt by educating students about their federal financial aid options before they turn to private student loans. As we continue to work to improve college affordability and address the student debt that burdens America’s middle class families, we must start by ensuring that students exhaust their federal aid options.”
There are several stark differences between private student loans and federal student loans. Federal student loans have fixed interest rates and offer an array of consumer protections and favorable terms, including deferment and forbearance in times of economic hardship, as well as manageable repayment options, such as the Income-Based Repayment and Public Service Loan Forgiveness programs. In contrast, private student loans, which resemble credit cards rather than financial aid, often have uncapped variable interest rates (which spiked as high as 18% in recent years), hefty origination fees, few, if any, consumer protections, and are ineligible for federal forgiveness, cancellation or repayment programs.
Specifically, the Know Before You Owe Act of 2012 would require private lenders to:
- Certify with the borrower’s school that the student is enrolled and the amount the student is eligible to borrow before issuing a private loan;
- Provide the borrower with quarterly updates on their loans, including accrued but unpaid interest and capitalized interest; and
- Report information to the Consumer Financial Protection Bureau about their student loans.
The Durbin-Harkin bill would require institutions of higher education to:
- Inform students about their federal financial aid availability and eligibility; their ability to select a private lender of their choice; the impact of a private loan on their eligibility for other forms of financial aid; and their right to accept, reject or cancel a private loan as allowed under current law; and
- Inform students about the terms and conditions of federal and private student loans.
The Know Before You Owe Act of 2012 is supported by several education, student, and consumer organizations, including: American Association of Collegiate Registrars and Admissions Officers, American Association of State Colleges and Universities, American Federation of Teachers, American Medical School Association, Campus Progress Action, Consumer Action, D?mos, Education Trust, National Association for College Admission Counselors, National Association of Student Financial Aid Administrators, National Consumer Law Center, National Consumers League, National Council of La Raza, The Institute for College Access & Success, U.S. Public Interest Research Group and United States Student Association.