CBA Says Recent Student Lending Legislation Misdirected, Needed for Federal – Not Private – Loans

July 16, 2018
Nick Simpson

CBA Says Recent Student Lending Legislation Misdirected, Needed for Federal – Not Private – Loans

 

CBA: “Private lenders offer a responsible product to help students achieve their education goals with transparent, plain language know before you owe information. The same cannot be said of the current state of federal student lending, which saddles students with unmanageable debt.”

 

Washington, D.C. – The Consumer Bankers Association today said legislation introduced by Sens Dick Durbin (D-Ill.), Tina Smith (D-Minn.), Jack Reed (D-R.I.), Sherrod Brown (D-Ohio), Tammy Baldwin (D-Wis.), and Ben Cardin (D-Md.) is misdirected and would be better targeted to federal student loans. Companion legislation, H.R. 6352, has been introduced in the House of Representatives by Rep. Jared Polis (D-Colo.)

 

“Provisions in this legislation are needed, but not for private student loans,” said CBA President and CEO Richard Hunt. “Private loans have comprehensive, plain-language disclosures so students and their families know the full cost of their private student loan up front. The same disclosures simply do not exist for federal loans and should.

 

“As the bill’s authors stated, there are several stark differences in federal and private loans. The most startling difference being a more than 20 percent default rate on federal loans compared to an about 98 percent repayment rate for private loans. Private lenders offer a responsible product to help students achieve their education goals with transparent, plain language know before you owe information. The same cannot be said of the current state of federal student lending, which saddles students with unmanageable debt.”

 

Under current law, banks are already offering the following safeguards for students and families taking private student loans:

 

  • Undertake robust underwriting which includes an assessment of creditworthiness and ability to repay. Federal loans are currently available to students without underwriting up to the cost of attendance. This nearly unlimited lending has a direct correlation with higher loan balances and increasing tuitions. Every dollar increase in federal loans adds between $0.25 and $0.63 to the price of tuition, according to the Federal Reserve Bank of New York.
  • Do not charge origination fees, like federal loans do, and offer both fixed and variable rate loan products with competitive interest rates.
  • Include three different plain language disclosures, covering 18 key provisions about the loan, given prior to disbursement. Federal student loan disclosures, on the other hand, are opaque and given at the time the loan is disbursed. These federal disclosures should be streamlined and improved. This simple step would improve transparency and help prevent over-borrowing.
  • Offer a 30-day right of acceptance period, during which the loan offer cannot be revised or revoked, as well as an express right to cancel before the loan is disbursed.

 

For some families and graduate students, private loans are a sensible alternative to federal loans, especially PLUS loans. Private student loans, which are usually co-signed, come with no origination fees (unlike federal loans) and offer competitive, market-based interest rates. Additionally, numerous private lenders offer competitive refinancing to help borrowers lower their interest rates and simplify or reduce their monthly payments.

 

Federal student loans account for approximately 92 percent of the $1.5 trillion in the national student loan debt and originate about 90 percent of all student loans annually. Federal student loans account also for the overwhelming majority of loans in default.

 

To ensure the federal government responsibly serves those most in need and utilizes the capabilities and expertise of the private sector to fully serve the marketplace, CBA has recommended:

 

  • Altering PLUS programs;
  • Improving federal “Know Before You Owe” disclosures,
  • More accurately titling so-called “Award” letters provided by colleges to “Financing” letters that clearly differentiate scholarships and loans from grants.
  • Requiring school certification;
  • Utilizing fair value accounting to show the true cost of federal student loans; and
  • Requiring public reports on the federal government’s direct loan portfolio.

 

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About the Consumer Bankers Association

The Consumer Bankers Association represents America’s retail banks above $10 billion in assets. We advance legislation and promote policies geared toward creating a stronger industry and economy. Established in 1919, CBA’s corporate member institutions account for 1.6 million jobs in America, extend roughly $3 trillion in consumer loans, and provide $270 billion in small business loans. Follow us on Twitter @consumerbankers.