House Passes Bill That Would Tighten Rules on Private Student Loans

December 11, 2009

An amendment in the Wall Street reform package approved today by the House of Representatives would tighten rules for private student lending, in part by ensuring that students talk to their financial-aid offices before they take out private loans.

The bill, HR 4173, would create sweeping new regulations for the financial sector, including a way to dismantle failing financial institutions. It also would establish a new agency to oversee consumer lending.

The amendment, offered by Rep. Jared Polis, a Democrat of Colorado, would require lenders to certify that a prospective borrower is a student, is eligible to borrow the full amount of the loan, and has talked with the financial-aid office about other options. The certification requirement, if enacted, would be stricter than current rules call for.

Under the measure, colleges would also have to tell students about any federal loans they are eligible for, a provision that higher-education experts say is important because many students who take out private loans are eligible for federal loans, which often have lower interest rates and more-flexible repayment options.

The bill, which passed the House, 223 to 202, on a largely party-line vote, still faces several hurdles before becoming law. A full version of the legislation has yet to be introduced in the Senate, and if such a bill passed that chamber, the two versions would then have to be reconciled. Draft legislation in the Senate of the financial-sector regulations does not currently include a provision similar to the Polis amendment.

But if they were included in the final legislation, the new requirements for lenders and colleges would strengthen other new rules regulating private student loans. Those rules, established by the Federal Reserve Board earlier this year, go into effect in February. They require private lenders to give prospective student borrowers a range of information, including the possible starting interest rate, the maximum interest rate over the life of the loan, and interest rates on federal loans for comparison purposes. But the new Fed rules do not require that lenders communicate directly with the financial-aid office, asking only that prospective borrowers say that they have been informed about federal options.

The Polis amendment, which would also require lenders to verify that private loans do not exceed the cost of attendance at any college, is necessary in part because student loans cannot be discharged in bankruptcy, said Rich Williams, a higher-education associate for U.S. PIRG.

"We should be making sure that these lenders are giving loans to students only for their education," Mr. Williams said. "Another really good piece of this is extra disclosures on the institutional side, so students really do have a good picture of what's available to them when they sit down with their institution."

Representatives of the student-lending industry did not immediately return calls seeking comment.