Students who are interested in applying for private loans may soon see the process changing. The House of Representatives passed consumer protection legislation last week that would further regulate private student loans, ensuring that students interested in borrowing them are aware of rates, federal alternatives, and borrowing limits at their school.
The bill moves to further regulate Wall Street in the wake of the credit crisis and ensuing economic recession, and also creates a consumer financial protection agency that's responsible for overseeing consumer credit such as credit cards, mortgages, and other bank loans. An amendment introduced by Democratic Representative Jared Polis of Colorado ensures that private loans to students are also included under this umbrella, and sets up additional rules that lenders and colleges must follow in issuing and certifying private loans.
Under this legislation, all private loans will have to be certified by a student's college, verifying the student's enrollment and the amount he or she can borrow. Before a school can certify a private loan, it must also inform the borrower of the availability of federal student financial aid. This builds on rules that will go into effect in February that state that students must be informed of interest rates and repayment terms up front by banks, and must certify that they have been informed of federal student loan options.
Effectively, it puts an end to direct-to-student private loans, which students can borrow without even informing the financial aid office, and which can be taken out for more than the student's cost of attendance for the academic year. With rising student loan default rates, risky loans like these have increasingly come under fire. These loans can be a quick way for students to find themselves in excess debt, as they make it easy for students to borrow more than they need to pay for school without having to investigate alternatives first.
The bill still needs to pass the Senate and be signed by the President before it can be enacted. Whether the Senate introduces language similar to the Polis Amendment remains to be seen, as it's unlikely financial legislation will be debate until after they finish with healthcare.