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A government student-loan website may soon treat private loan companies more favorably
May 31, 2018
The private student loan industry may soon get more favorable treatment on the government’s financial-aid website.
Right now, the Department of Education’s Office of Federal Student Aid website presents private student loans as an option students should only consider after loans offered by the government. But the site could soon take a less-biased approach towards private loans, according to reports of a speech given by Wayne Johnson, the head of FSA’s strategy and information office at a lending conference on May 9.
Johnson’s speech indicated that the Department “might move to assist private student lenders in building awareness amongst student populations that are unserved by federal loans.” That’s according to an analyst note published this month by Moshe Orenbuch, a managing director at Credit Suisse, summarizing highlights from the Education Finance & Loan Symposium.
Johnson told the crowd that the department’s website “was mainly supportive of federal loan programs, but that would likely change in the near future,” Orenbuch wrote. (A Department spokeswoman didn’t respond to requests for comment about the speech.)
Any scenario which portrays private student loans in a favorable light, particularly as compared to federal debt, would be “troubling,” said Jennifer Wang, the director of the D.C. office of The Institute for College Access and Success, a research and advocacy organization focused on college access and affordability.
Over the past several years, the government has shied away from promoting private student loans, which consumer advocates and financial aid experts view as much riskier than federal debt.
The comments are the latest indication that the Trump administration is taking a less aggressive approach to monitoring private companies involved in student loans and education. Another recent example: the Department of Education is winding down a unit developed during the Obama administration to investigate fraudulent practices among for-profit colleges, the New York Times reported this month.
Mick Mulvaney, the interim director of the Consumer Financial Protection Bureau also demoted an office that has historically probed and policed student loan companies to one offering financial education.
If officials go through with a website change, it would come as the Department of Education and Republican lawmakers appear to be pushing for private companies to play a larger role in student lending. Republican leaders in Congress have proposed capping the amount of federal money graduate students and parents can borrow to finance school, a move that would create a larger market among those borrowers for private student loans.
Johnson, who has worked at student loan and credit-card companies, has expressed admiration for private-sector technology on past occasions and has indicated he’d like to incorporate both some of the companies and their approach into the government financial aid and student loan system.
Why the focus on private loans matters
If the Department goes through with the move to portray private loans in a more neutral light, it could contradict advice given by financial aid professionals and even private student lenders themselves to rely as much as possible on the federal student loan program before turning elsewhere for financing.
The government limits the amount of money undergraduate students can borrow through the federal program and experts generally recommend students exhaust their federal loan before turning to private loans.
For their part, private lenders would be “supportive of encouraging students to explore all options,” said Nick Simpson, the vice president of public affairs at Consumer Bankers of America, a trade group. “We believe that for many students, private loans are a better option than federal loans,” he said. Borrowers with a good credit history and a demonstrated ability to repay could find that private loans are a more affordable option for them, he said.
In the past, the Department’s website has portrayed private loans as “an option that students should consider,” said David Bergeron, a senior fellow at the Center for American Progress, a left-leaning think tank and a more than 30-year veteran of the Department.
But in the mid-2000s, the site started talking more critically about private loans in the wake of an investigation conducted by then New York Attorney General Andrew Cuomo into kickbacks lenders were paying to colleges to steer students towards their products.
If officials take any steps to portray private loans in a more neutral light on the government’s website, “It would be going back and exposing students to more potential harm as a result of being steered into loan programs that don’t contain the same consumer protections,” as federal loans, Bergeron said.
• Federal student loans are typically a better option for borrowers, experts say. Interest rates on some federal student loans are subsidized by the government, often making them lower than what’s available on the private market — particularly to young people with no credit history.
• The rates on federal student loans are also fixed over the lifetime of the loan, which is often not the case with private debt. Typically, private student loans also require an adult with a credit history to co-sign the loan, meaning the student’s mom, dad, grandparent or other relative is on the hook if the repayment plan goes awry.
• In addition, the government offers a variety of flexible repayment programs if borrowers get into financial trouble, which can be rare on the private market. And federal student loans come with opportunities for forgiveness after at least a decade of repayment.
“For most students, federal student loans are going to be their best option because of all the inherent protections that are built into the program,” said Justin Draeger, the president of the National Association of Student Financial Aid Administrators.
In some cases, graduate students or parents with good credit history may qualify for a better interest rate on the private market, Draeger said. But even then, there are trade-offs. “You largely aren’t going to get the same protections on the back end during repayment,” he said.
Though consumer advocates and financial aid professionals generally agree that private loans are a riskier way to finance college, nearly half of students with private loans still have room to borrow through the federal program, according to government survey data, Wang noted.
That could be because students may not know the difference between federal and private loans, Wang said. “If the advice on the Department of Education’s own website is going to get more muddled or more confusing, I really worry for borrowers,” she said.