I have gotten quite a few questions about how the recently passed HEOA legislation is going to impact the abysmal state of private student loan disclosure. I found this out firsthand earlier this year. While applying as a co-signer for a student loan, I went through the following process:
Step 1: Apply on-line.
Step 2: Notified via snail mail several days later that the application had been approved.
Step 3: Reviewed promissory note included with approval letter that was missing one tkey piece of information: the interest rate on the loan. Neither the index (e.g., LIBOR or Prime) or the interest rate margin were anywhere to be found in the note.
Step 4: Call customer service department to inquire what interest rate on my loan will be. Told to sign the promissory note AND then I would receive this information. Hmmmm....interesting. Tell me the last time you agreed to purchase a product BEFORE you knew what the price was.
Step 5: Call customer service department to inquire what the interest rate on my loan will be. Told to sign the promissory note AND then I would receive this information (at least they were consistent). When I pressed the rep. a bit more, I was told "Sorry this is our policy." A dreadful policy I might add. Needless to say this loan was never consummated.
Relief is on the way, however, in the form of increased disclosure on private loans. Here is the laundry list of items that MAY be required to be disclosed. I say MAY only because the Federal Reserve has up to 18 months to decide. All of the information that follows is found in Title X of the Higher Education Opportunity Act.
This post will focus on what information needs to be disclosed during the loan application process:
- There is a lot of information here, 18 disclosure requirements to be exact. To avoid information overload, it will be critical to format this information in a way that highlights the most important elements (i.e., range of interest rates, fee structure)
- Why wait 18 months to implement these changes? It would be great to see lenders voluntarily increase disclosure of private student loans. Our clients have told us that this will be a critical criterion for their lender selection process this year given their concerns about the lack of transparency. The items above will serve as a useful checklist for that purpose.
- The most compelling disclosure item is the requirement to calculate the cost of the loan using the maximum rate of interest (here are my thoughts on the "As low as....teaser rate marketing"). Here is the full description in the bill:
- Most in the financial aid community are NOT happy about the self-certification process described in the bill.