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Congress Considers Increased Student Loan Oversight


December 3, 2009
by Scholarships.com Staff
Federal student loans aren't the only form of student borrowing that may soon undergo a legislative makeover. As Congress debates the creation of a Consumer Financial Protection Agency, advocacy groups are continuing to push for inclusion of rules that would give the agency more oversight of student loans.

Federal student loans aren't the only form of student borrowing that may soon undergo a legislative makeover. As Congress debates the creation of a Consumer Financial Protection Agency, advocacy groups are continuing to push for inclusion of rules that would give the agency more oversight of student loans.

The Consumer Financial Protection Agency would already oversee other kinds of lending, such as credit cards and student loans. However, there's growing debate over how extensive the agency's student loan oversight should be, specifically regarding loans that some colleges make directly to their students. A House amendment to specifically include these loans under the agency's purview was rejected by the Financial Services Committee, but is expected to be revisited as the House prepares to take up a floor vote on the bill. The Senate version of the bill, meanwhile, does authorize the agency to supervise loans made by colleges to their students.

The House version initially excluded loans schools make to their students because many colleges make small, short-term, "emergency" loans to their students to help them pay bills while they secure other forms of funding. Career colleges, on the other hand, have begun lending large sums to their students, often with terms that are less favorable than many private loans. These loans typically have a high default rate and can burden students with difficult payments, as interest rates can easily reach 18 percent and the schools may have less forgiving repayment processes than traditional lenders. This has student advocates concerned, especially in light of recent economic events.

Colleges have been increasingly encouraged to act as lenders to their students in the face of the economic recession and the preceding credit crunch. As it became harder for students to obtain sufficient student loans from banks and other traditional lenders, schools began to step in to close the gap. This included for-profit career colleges lending significant portions of the cost of tuition to their students. The latter category of loan is increasingly widespread, with many of the largest career colleges reporting plans to lend out tens of millions of dollars directly to their students next year.

In addition to being a way to enroll students who wouldn't otherwise be able to secure funding, these direct-to-student loans are also ways for for-profit colleges to get around the "90/10" rule that states that no more than 90 percent of a for-profit college's revenue can come from federal student financial aid. By charging more in tuition but giving more in loans, colleges can get around this requirement, even as more of their students qualify for federal aid.

This isn't the only career college practice that's receiving criticism at the federal level. The Department of Education has been investigating recruiting practices at for-profit colleges and recently issued several proposed rules in its negotiated rule-making process with career colleges. The proposed changes would do more to ensure that colleges aren't giving incentive pay to recruiters and that students who are being enrolled are able to adequately benefit from a degree.

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