Written by: Sarah Johnson | January 14, 2022

With conversation on the national stage centered around forgiving student loans and what borrowers will do when payments resume after a two year hiatus due to the pandemic on May 1st (pushed out from January 31st, 2022 by Biden due to Omicron late December 2021), now seems like a great time to look into "Know Before You Owe" legislation. With articles like "Is Private College Worth It? Or Is It Just Another Scam?", "Millions of student loan borrowers don’t have a diploma to show for their debt", and "There are no easy answers on canceling student debt", it is clear the student loan debt crisis is top of mind for many Americans.

Proposed in three states and on the national level, "Know Before You Owe" legislation focuses on loan education, and is an interesting response to criticism around the country related to how informed borrowers (many under the age of 20) are when they take out student loans.

What issue is this legislation looking to address?

What are the different types of Federal higher education loans?

There are a few different types of loans that are important to understand. Federal Direct Loans are federal student loans made directly by the US Department of Education. There are four types of federal loans: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans. FFEL Loans are federally guaranteed student loans originally funded by private companies. The program for these loans ended in 2010 to make way for Direct loans. Perkins Loans are low-interest federal student loans for undergraduate and graduate students with exceptional financial need (schools stopped being able to issue these Sept 2017). Stafford loans are low-interest loans for eligible students to help cover the cost of higher education at a four-year college or university, community college, or trade, career, or technical school. Eligible students at participating schools can borrow directly from the US Department of Education.

Grad PLUS (or Direct PLUS) are loans made to eligible graduate or professional students through schools participating in the Direct Loan Program. People who qualify for these loans are graduate or professional students enrolled at least half-time in a program leading to a graduate or professional degree, who do not have an adverse credit history, and who meet general eligibility requirements for federal student aid. Parent PLUS loans are Direct PLUS Loans are made to eligible parents. To qualify for a Parent PLUS loan, someone must be the biological or adoptive parent (or in some cases, the stepparent) of a dependent undergraduate student enrolled at least half-time at an eligible school, not have an adverse credit history, and meet the general eligibility requirements for federal student aid.

Why is it better to take out federal loans than private loans?

When looking at private lender loans and federal student loans, there are some stark differences. When taking out federal student loans, borrowers have access to fixed interest rates and a multitude of consumer protections. Some of these protections include deferment and forbearance in times of economic hardship and manageable repayment options (think the Income-Based Repayment and Public Service Loan Forgiveness). In contrast, private education loans typically resemble credit cards. Instead of acting as financial aid, private loans have few consumer protections and are subject to uncapped variable interest rates.

Income Share Agreements, or ISAs, are private student loans that borrowers repay based on their future salary. In return for obtaining the loan, after borrowers graduate, they agree to pay a fixed percentage of their income for a set amount of time to pay back the loan.

Private loans are ineligible for any federal forgiveness, cancellation, or repayment programs. According to CNBC,

When surveyed, two-thirds of private loan borrowers said they did not understand the major differences between private and federal options when taking out their loans. Further, 53 percent of undergraduate students reported taking out private student loans in 2015-16 without first exhausting their allotted federal loan monies.

How much higher education loan debt do Americans have?

Student Loan Hero reported that 69% of college students in the class of 2019 took out private and/or federal student loans. SLH also reported Americans owe over $1.71 trillion in student loan debt. According to the Education Data Initiative, there are currently 44.7 million people who have outstanding student loans, and 42.3 million (roughly 95%) of these people carry a balance on a federal loan. EDI also reported 79 million Americans have used student loans at some point in their lives. Just under 45% (34.3 million) of Americans have paid off their student loan debt entirely. This graph by the Education Data Initiative depicts student loan debt by education level around the nation.

The largest amount (581 million people) of debt is owed by people with associate's degrees. The average amount owed in federal loans by people with associate's degrees is $21,890. When looking at borrowers, around 60% (23 million) of indebted student borrowers are women, and around 40% (17.4 million) are men.

Finally, current American student loan debt is broken down in age:

  • 7.5 million student borrowers are under the age of 25
  • 14.8 million are 25 to 34
  • 14.1 million are 35 to 49
  • 6.1 million are 50 to 61
  • 2.2 million are 62 and older

The Illinois Know Before You Owe Private Education Loan Act of 2021

IL HB2746, or the Know Before you Owe Private Education Loan Act, was enacted after unanimous passage in both chambers at the end of August 2021. The act "aims to provide potential student borrowers with critical information, allowing them to make informed decisions about how to responsibly finance their education," by ensuring student borrowers are informed of their federal loan eligibility before taking out private loans. The act also imposes new certification and reporting requirements on private student lenders and educational institutions.

First, under the bill, private loan companies must obtain certain certifications from educational institutions prior to disbursing private student loans or income share agreements to potential borrowers. Before educational institutions can provide this certification, the institution must determine whether the student borrower has exhausted available federal financial aid. If the student borrower has not, schools must disclose this information to them. The disclosure must include:

  • The amount of federal financial aid for which the borrower is eligible
  • "The advantages of federal loans . . . including disclosure of income driven repayment options, fixed interest rates, deferments, flexible repayment options, loan forgiveness programs, additional protections, and the higher student loan limits for dependent borrowers whose parents are not eligible for a Federal Direct PLUS Loan"
  • The impact of a private loan on the borrower's eligibility for federal financial aid
  • The borrower's right to select a private student loan lender of the borrower's choice and their right to reject or cancel a private student loan

The bill also requires private student lenders provide detailed loan statements to borrowers at least every three months to students, demonstrating how borrower's private student loan obligations increase while they are still enrolled in school.

The legislation defines "private educational lender" broadly, including ISA providers and student financing companies. The ISA-specific disclosures in the legislation require disclosure of an annual percentage rate applied to the ISA based on specified post-graduation earnings scenarios. ISA providers are also required to list the APR for each ISA.

Finally, private student lenders must submit an annual report including information regarding the schools at which the lender disbursed funds, the volume of loans made annually at each school, the historical lifetime default rate for borrowers obtaining covered loans, and copies of exemplar documents provided to borrowers. Any educational institution located within Illinois, including any online educational program, providing postsecondary education is required to do this.

New Jersey Know Before You Owe Student Loan Debt Act

The New Jersey Know Before You Owe Student Loan Debt Act, S749, has been introduced four times since 2016 in both chambers but has never made it out of committee. This bill aims to increase student awareness concerning student debt, encourage students to borrow less than the maximum amounts they are awarded, and begin making repayments earlier.

This bill requires an institution of higher education that receives student loan information for a student in the institution to send the student by regular mail each semester a student debt letter. The student debt letter would include:

  • An estimate of the total amount of student loans taken out by the student
  • An estimate of the potential total payoff amount of the student loans incurred or a range of the total payoff amount
  • An estimate of monthly repayment amounts that a similarly situated borrower may incur, including principal and interest, for the amount of loans the student has taken out at the time the information is provided
  • The percentage of the borrowing limit the student has reached at the time the information is provided
  • A statement that the student should contact the lender to determine when the borrower is authorized to begin making repayments, and whether those repayments would include both the principal and interest amount of the loans

The letter would also include information concerning options for reducing borrowing through scholarships, reduced expenses, work-study, or other opportunities.

The bill also requires each full-time undergraduate student at a public institution of higher education who has student loan debt to complete an online course, or receive in-person counseling from a qualified member of the institution, on the repayment of student loan debt and the consequences of the failure to make required repayments. The online course or in-person counseling will be required during the student's final semester prior to graduating from the institution.

Know Before You Owe Private Education Loan Act of 2019

In 2019, US Senators Dick Durbin, Jack Reed, Sherrod Brown, Ben Cardi, Tina Smith, and Tammy Baldwin introduced the Know Before You Owe Private Education Loan Act. The purpose of this legislation was to prevent unnecessary private student loan debt and improve transparency in higher education borrowing by requiring schools to counsel students before they sign on to expensive private education loan debt and inform students of any unused federal student aid eligibility. S2184 aimed to revise requirements in the Truth in Lending Act to ensure disclosures related to federal loans in private education loan applications.

Specifically, the bill would have mandated Private Lenders to:

  1. Obtain certification from a private college or university of the student’s enrollment status, the student’s cost of attendance, and the difference between that cost and the student’s estimated financial assistance, before issuing a private education loan for a student
  2. Send loan statements to borrowers at least once every three months the student remains enrolled at an Institution of Higher Education (IHE)
  3. Notify the relevant IHE of the loan amount and the student to whom it applies no later than the date funds are issued

The bill would also amend the Higher Education Act to require IHEs to determine whether students have exhausted their options for federal financial aid assistance, and if not, notify borrowers of the availability of federal aid, and their ability to choose their own private educational lender.

Bill sponsor, Dick Durbin, had this to say, “Young Americans and their families are struggling with staggering amounts of student loan debt and it only continues to rise. Our bill would help educate students about the pitfalls of private student loans, which can carry high interest rates and few consumer protections compared to federal loans. If we want to give this generation a fighting chance at achieving the American Dream, we have to address this fast-growing financial crisis in our country.”

Conclusion

There is a student loan crisis in the United States and legislation that aims to educate borrowers before they sign on would be an incredibly positive step forward. As part of pandemic relief measures, loan payments and loan defaults on student loans were halted. Prior to this hault, around 15% of student loans were 90 days or more delinquent or are in default. With the average monthly student loan payment currently at $393, these loans are not inconsequential for people. Ensuring people utilize the full amount of their Federal aide before looking at private loans, and understanding they do not need to take private loans offered to them, is incredibly important.

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