Consumers with mortgages> and credit cards aren t the only ones who stand to benefit from the financial reform bill. College students and graduates with private student loans could see new protections as well.
The latest version of the financial reform bill, which could be voted on and signed into law as soon as July 4, features a new watchdog agency, the Consumer Financial Protection Bureau (CFPB), which would be created to oversee several financial products, including private student loans.
For years, these loans have been among the riskiest student loan options, in part because they offer fewer consumer protections than federal student loans and because their interest rates are often higher. As of now, the bureau won t be structured to change private student loan terms, but it will serve as the central authority overseeing lending practices and addressing borrower complaints.
Here are four new protections private student loan borrowers are likely to see should the current version of the financial reform bill become law.
New regulatory authority
The bureau will supervise most private student loans that are distributed by schools, banks and other financial companies. It will also regulate advertising by private lenders and disclosure requirements for these loans. For example, private student loan lenders are required to inform borrowers that they may be eligible to apply for federal student loans regardless of their family income. Also, the lender must disclose interest rates before a student signs up for the loan. (Both of these requirements were part of the Higher Education Opportunity Act of 2008, and going forward, the CFPB will take over the responsibility from the Federal Reserve to make sure they re carried out.)
One potential loophole here is that the bureau's supervision won t have direct authority over banks with less than $10 billion in assets. The final version of the bill, instead, states that the Federal Deposit Insurance Corporation will be responsible to oversee that these banks act in accordance with the bureau's rules.
A source for borrowers looking to file a complaint
Currently, there s no official single bureau or agency where private student loan borrowers can file complaints against their lenders. The Consumer Financial Protection Bureau would change that, serving as a centralized clearinghouse. If you have all complaints going to one location, you re more likely to get enforcement when there is a pattern of abuse, says Mark Kantrowitz, publisher of FinAid.org and FastWeb.com. The bureau would have the authority to pursue problem lenders and to propose additional regulations for any new and widespread problems that they identify.
A private student loan ombudsman
The financial reform bill also establishes a private student loan ombudsman who would be employed by the bureau and would mediate disputes between borrowers and lenders. (Currently, an ombudsman for federal student loans exists at the Department of Education but not for private loans.) Currently, if they run into a problem with a lender they are truly at mercy of their lender, says Pauline Abernathy, vice president at The Institute for College Access & Success, a nonprofit independent research organization.
This new position could also be helpful for students who have a mix of federal and private student loans and need the ombudsman to mediate disputes regarding a mixture of loans.
New policy recommendations could be on the way
The latest version of the financial reform bill excludes some provisions that could have provided additional protections to students. For example, private lenders won t be required to receive school certification for their loans; this means they won t have to confirm that the borrower is actually attending a college or the amount of their remaining loan eligibility. As a result, the lender can give the borrower more money than they need, potentially helping a student dig himself further into debt. Going forward, however, it s possible the bureau could implement a regulation making school-certified loans a requirement, says Kantrowitz.
Each year, the bureau's ombudsman for private student loans will have to issue a report to Congress, the Secretary of Education and Secretary of the Treasury about problematic trends in the sector and could request new laws that would address them. So it s possible that the bureau could pick up where the financial reform bill will leaves off by recommending additional laws pertaining to private student loans in the future.