Enhanced Private Student Loan Disclosure and the Higher Education Opportunity Act

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:

‘(1) DISCLOSURES REQUIRED IN PRIVATE EDUCATION LOAN APPLICATIONS AND SOLICITATIONS- In any application for a private education loan, or a solicitation for a private education loan without requiring an application, the private educational lender shall disclose to the borrower, clearly and conspicuously--

‘(A) the potential range of rates of interest applicable to the private education loan;
‘(B) whether the rate of interest applicable to the private education loan is fixed or variable;
‘(C) limitations on interest rate adjustments, both in terms of frequency and amount, or the lack thereof, if applicable;
‘(D) requirements for a co-borrower, including any changes in the applicable interest rates without a co-borrower;
‘(E) potential finance charges, late fees, penalties, and adjustments to principal, based on defaults or late payments of the borrower;
‘(F) fees or range of fees applicable to the private education loan;
‘(G) the term of the private education loan;
‘(H) whether interest will accrue while the student to whom the private education loan relates is enrolled at a covered educational institution;
‘(I) payment deferral options;
‘(J) general eligibility criteria for the private education loan;
‘(K) an example of the total cost of the private education loan over the life of the loan--
‘(i) which shall be calculated using the principal amount and the maximum rate of interest actually offered by the private educational lender; and
‘(ii) calculated both with and without capitalization of interest, if an option exists for postponing interest payments;
‘(L) that a covered educational institution may have school-specific education loan benefits and terms not detailed on the disclosure form;
‘(M) that the borrower may qualify for Federal student financial assistance through a program under title IV of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.), in lieu of, or in addition to, a loan from a non-Federal source;
‘(N) the interest rates available with respect to such Federal student financial assistance through a program under title IV of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.);
‘(O) that, as provided in paragraph (6)--
‘(i) the borrower shall have the right to accept the terms of the loan and consummate the transaction at any time within 30 calendar days (or such longer period as the private educational lender may provide) following the date on which the application for the private education loan is approved and the borrower receives the disclosure documents required under this subsection for the loan; and
‘(ii) except for changes based on adjustments to the index used for a loan, the rates and terms of the loan may not be changed by the private educational lender during the period described in clause (i);
‘(P) that, before a private education loan may be consummated, the borrower must obtain from the relevant institution of higher education the form required under paragraph (3), and complete, sign, and return such form to the private educational lender;
‘(Q) that the consumer may obtain additional information concerning such Federal student financial assistance from their institution of higher education, or at the website of the Department of Education; and
‘(R) such other information as the Board shall prescribe, by rule, as necessary or appropriate for consumers to make informed borrowing decisions.

Insights

• 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: 

        "(K) an example of the total cost of the private education loan over the life of the loan--‘(i) which         shall be calculated using the principal amount and the maximum rate of interest actually offered         by the private educational lender."

• Most in the financial aid community are NOT happy about the self-certification process described in the bill. 

Comments

[JR Moreau]

THANK YOU for this post! I am so concerned about this subject.

Can you offer any advice to someone who's already got private student loans? I've refinanced as low as I can go on my interest rate and it's still killing me.

Thank you and if you can respond via email or on my blog in anyway I would be deeply grateful.