NAICU Washington Update

Implications of House Financial Regulation Bill for Colleges

December 18, 2009

The House passed a bill to regulate the financial sector on December 10.  Buried in the 1,700-pages of the reform bill are several provisions with implications for colleges.  The Senate has yet to introduce companion legislation.

The legislation, H.R. 4173 authored by Rep. Barney Frank (D-Mass.), explicitly covers "private education loans" which includes some made by colleges.  Last August's Higher Education Act reauthorization extended federal authority over student loans made by private lenders.  The Federal Reserve wrote the regulations (as part of the "truth in lending" provisions), and provided a definition of private education loans.  The definition excludes non-interest-bearing, institution-based, tuition payments plans and emergency loans, but it includes other loans made by colleges and their related organizations - such as institutional loans included in student aid packages.

Both the HEA provision and this new legislation use the same definition of a private education loan, and are aimed at protecting students from unscrupulous lenders - including post-secondary institutions with questionable lending practices.  But while the truth-in-lending regulations require that borrowers self-certify their eligibility for the loans, H.R. 4173 would require lenders to certify both students' eligibility and that they have talked with the college's financial aid office. This is to ensure that colleges know about private debt their students are assuming.

There has been growing concern among policy makers about the explosion of expensive, direct-to-consumer educational loans that colleges don't even know their students are assuming.  Much of the marketing on these loans, with excessive interest rates, is done through late-night television or the Internet.  There is evidence that many of these students could have borrowed through the cheaper federal student loan programs instead.

Just how other parts of this massive bill might affect colleges is unclear at this point.  However, it seems possible that colleges providing private education loans could come under the authority of the consumer protection agency to be created under the legislation -- and then would even have the opportunity to pay a fee for the privilege of being overseen. 

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