Private student loans> could soon become more borrower-friendly if two pieces of legislation moving through Congress don t push away too many lenders in the process.
The first protection is embedded in the Senate and House versions of the financial regulation bill: Both versions are seeking to create a consumer protection entity that, among other things, would field borrower complaints about unfair practices with private student loans and oversee lenders underwriting policies. The second helping hand would come from the Private Student Loan Bankruptcy Fairness Act of 2010, introduced last month. If passed, it will allow for some private student loans to be discharged when a borrower files for bankruptcy. (Currently, discharging unpaid balances on private student loans is very difficult.)
On the one hand, the bills could result in more protections for borrowers. However, they could carry some downsides, says a spokesman for the American Bankers Association. Greater regulation, for example, could scare some lenders away, the spokesman says. What s more, the fact that students could get out of paying for their loans might prompt others to hike their fees. The proposals inject a greater uncertainty into the marketplace for these lending products, and anytime you do that it impacts cost, says the spokesman.
Here are four ways private student loans could change.
A new regulator
When some version of the financial regulation bill becomes law, it is likely to include a consumer protection entity that could combine parts of the House and Senate bills, says Ruth Susswein, deputy director of national priorities at Consumer Action, a national nonprofit consumer advocacy group.
This consumer protection entity would serve as the primary authority of the private student loan sector and this is where borrowers would go to file complaints against lenders. If a particular lender is generating a lot of complaints or if a particular type of complaint is appearing frequently across the industry, you ll be more likely to see action when those complaints are concentrated within a single organization that has oversight, says Mark Kantrowitz, publisher of FinAid.org and FastWeb.com. (Currently, state banking authorities and the Office of Thrift Supervision, among others, provide some oversight of the private student loan sector.)
However, the Senate s financial regulation bill includes a potential loophole; under this bill, the consumer protection entity might not have authority over lenders with less than $10 billion in assets meaning that Sallie Mae, the largest private student loan lender, could be excluded from this its oversight. (Sallie Mae finances its private student loans through Sallie Mae Bank, whose total assets are less than $10 billion.) Today we are regulated like all other financial companies, and we don t expect this legislation to change that, says a Sallie Mae spokesperson.
Loans could be certified by colleges
Most private student loans are either school certified where the lender informs the college about the loan that they plan to give a student or direct-to-consumer loans, where the lender gives a private loan to a student without consulting with the college he or she is attending.
The House version of the financial regulation bill would require that lenders certify all of their direct-to-consumer private student loans with the college. Before issuing the loan, lenders would have to confirm that the student is attending that school and how much they are eligible to borrow. This would keep lenders from giving private loans that are larger than the amount students need to fill the gap between federal financial aid and the total cost of attendance, says Pauline Abernathy, vice president at The Institute for College Access & Success (TICAS), a nonprofit independent research organization.
Increased competition with federal student loans
The current House bill would also let colleges counsel students to encourage them to tap into all of the federal aid eligibility before turning to private student loans. Once a college is informed by a lender that a student is considering taking on a private loan, it would likely contact them to provide a detailed rundown of their federal aid options, says Kantrowitz.
The result could be a pickup in federal student loan underwriting. Nearly two-thirds of private student loan borrowers don t max out their federal loans, according to 2007-08 data (the most recent) from the Project on Student Debt, an initiative of TICAS that tracks college student debt. That s because often students are unaware of all the federal student loans they can qualify for, says Abernathy.
Unpaid balance may be discharged
Most consumer debt can be discharged when a borrower files for bankruptcy but it's extremely difficult to discharge private student loans. That could change thanks to bills that were introduced to the House and Senate last month. The Senate version would allow all private student loans to be discharged when a borrower files for bankruptcy, whereas the House version would limit most discharging to loans from for-profit institutions, like banks, but not from nonprofits, like most colleges.
Federal student loans aren t dischargeable either. But unlike private student loans, they offer repayment plans to help borrowers who hit a rough financial patch.