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From Banking and Finance Law Daily, April 2, 2014

Brown “Know Before You Owe” plan tackles problem of rising school loan debt

By Katalina M. Bianco, J.D.

Senator Sherrod Brown (D-Ohio), concerned with the ever-increasing amount of student loan debt, has announced a plan that he says would protect college students and their families from “confusing” private student loan practices and help them refinance debt. Brown’s announcement comes as college students are set to begin receiving financial aid award letters.

Level of debt. The amount of student loan debt in the United States now exceeds $1.2 trillion, according to Brown. Student loan debt has surpassed credit card and auto loan debt and is second only to mortgage debt. As the cost of tuition rises, the average debt for a student graduating in 2014 is approximately $30,000.

“Education has always provided Americans the opportunity for a middle-class life and financial security,” Brown said. “But an entire American generation is suffocating under the weight of student loan debt, unable to start businesses, purchase homes, and contribute to their families and communities.”

The senator said that to keep the country growing, student loan debt must not deter future generations from pursuing higher education. “That means that prospective and current students should have transparency as they take on student debt. And graduates with private loan debt should have the opportunity to refinance their debt so they can focus more on using their education than paying for it.”

Private vs. federal loans. Eighty-one percent of borrowers with high student debt have private loans. Private loans are more like credit cards than federal student loans and typically have higher interest rates—that can be more than 18 percent—and are more difficult to refinance and offer limited, if any, repayment options based on income. Private loans are ineligible for federal forgiveness, cancellation, or repayment programs, Brown said.

Federal student loans, on the other hand, 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.

Know Before You Owe. One of the problems with student loans is that the contracts often have fine print that is “often confusing and even misleading,” according to Brown. As a remedy, the senator is putting forth the Know Before You Owe Private Student Loan Act. The bill would require private student loan lenders to make contracts easier to understand, to prevent borrowers from ending up with “unexpected and overwhelming debt.”

Two-thirds of private loan borrowers, including those who took out both private and federal loans, said that they did not understand the major differences between private and federal options, Brown said. Further, a majority of undergraduate students who borrowed using private student loans in 2007-2008 did so without first exhausting their eligibility for safer, cheaper federal loans.

Specifically, the Brown bill would amend both the Higher Education Act and the Truth in Lending Act to strengthen requirements surrounding private student loans. The measure would provide students with more information about how to maximize federal loans before looking to private loans from schools and also would offer more transparency for students looking at private loans after they’ve maximized federal loan options and scholarships from private lenders. The proposed legislation would require private student loan lenders to:

  • clearly state the difference between what a student’s cost will be at her school compared to her estimated financial assistance;

  • provide students with updated information regarding their private loans at least once every three months; and

  • submit an annual private student loan report to the Consumer Financial Protection Bureau to ensure progress in making higher education more affordable.

REFI for the Future Act. The senator also urged passage of his Refinancing Education Funding to Invest (REFI) for the Future Act. The intention of the bill is to provide students with more affordable refinancing options at no cost to taxpayers. The measure would authorize the Treasury Department to find creative solutions to eliminate inefficiencies in the private student loan market and accommodate reasonable refinancing opportunities for private student loan borrowers. It also would:

  • encourage greater competition, innovation, and participation of private capital in the private student loan refinancing market;

  • require regular reporting and oversight;

  • expire no later than five years after enactment; and

  • create opportunities for private student loan borrowers to take advantage of the current low interest rates.

Brown efforts. Brown noted that in 2013 he voted for an amendment that would cap student interest rates at their current rate. He voted against a proposal that he said would hurt low and middle-income students in the long term by allowing future interest rates in excess of 10 percent.

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