Private Student Loans Examined in New Senate Legislation

The Know Before You Owe Act of 2012 would lend transparency to private loans.


On March 29, Sens. Dick Durbin (D-Ill.) and Tom Harkin (D-Iowa) introduced the Know Before You Owe Act of 2012. The senators wrote the legislation in order address the fact that, as Durbin's press release states, "two-thirds of private student loan borrowers were not aware of the dramatic difference between federal student loans and risky, higher-interest, private student loans" and "[i]n many instances students have not applied for federal aid before they apply for private student loans or have not exhausted their federal aid options."

As regular readers know, the Student Loan Ranger is a big supporter of maximizing your federal loans before taking out private loans. There are a wide range of reasons, including the fact that federal loans contain important borrower protections that can help you afford your monthly payments and avoid default.

Despite these protections, as we noted last December, a Department of Education report, The Expansion of Private Loans in Postsecondary Education, found a disturbing rise in private loan borrowing among undergraduates from 2003-2004 to 2007-2008.

[Find out more about student loans.]

While the Student Loan Ranger doesn't pretend to understand the reasons for this rise (students may be unaware of or underestimate the importance of the borrower protections in federal loans, confused or daunted by the federal loan application process, or simply may be following the recommendations of financial aid offices), we did plug the Consumer Finance Protection Bureau's (CFPB) Know Before You Owe initiative and urged students to E-mail the CFPB with their private student loan stories as part of the search for a remedy.

The Know Before You Owe Act is a new and important development in this story.

The act would require institutions of higher education to inform students about their federal financial aid availability and eligibility; their ability to select a private lender of their choice; the impact of a private loan on their eligibility for other forms of financial aid; and their right to accept, reject, or cancel a private loan as allowed under current law. It would also require schools to inform students about the terms and conditions of federal and private student loans.

[Learn about a big change coming to federal graduate student loans.]

Private lenders would be required to certify with the borrower's school that the student is enrolled, as well as the amount the student is eligible to borrow before issuing a private loan. The private lenders would also have to provide the borrower with quarterly updates on their loans, including accrued but unpaid interest and capitalized interest. In addition, private lenders would have to report information to the Consumer Financial Protection Bureau about the student loans they issue.

The Student Loan Ranger thinks members of Congress from both sides of the aisle can support these common sense disclosure requirements. And clearly informing students and their families about their rights and the terms and conditions of federal and private student loans could help prevent some students' college dreams from turning into long-term financial nightmares.

If you agree with the Know Before You Owe Act, you can call or E-mail your Representative and Senators and urge them to support it. In addition, you can use the Twitter function on this post to tell all your friends about the act.

If you are concerned about your educational debt, register for one of our upcoming student debt relief webinars, during which we'll describe in detail what you need to know to take advantage of existing student debt relief programs like income-driven repayment plans and Public Service Loan Forgiveness.

And keep ahead of the curve by following us on Twitter (use #studentdebthelp) and Facebook. Remember, the things we discuss today may become the legislation of tomorrow.

Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works' educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.