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WASHINGTON, DC -- Democratic lawmakers in the U.S. House of Representatives are seeking to put a stop to unethical measures taken by private lenders to curry favor with colleges and universities - measures that can ultimately decrease student and parent borrowers' choices in how to pay for college.
Recent news reports have shown that private lenders sometimes offer gifts or other questionable incentives to colleges that agree to encourage students to take out their education loans with those specific lenders. The Student Loan Sunshine Act, introduced in the House today by U.S. Reps. George Miller (D-CA), Ruben Hinojosa (D-TX), Tim Bishop (D-NY), Joe Courtney (D-CT), and John Yarmuth (D-KY), would ban gifts from lenders to college employees and would require lenders to disclose the terms of their arrangements with colleges and universities. Senators Edward M. Kennedy (D-MA) and Dick Durbin (D-IL) recently introduced a companion bill in the Senate.
"At a time when more and more students and families are relying on loans - and incurring greater amounts of debt - in order to pay for a college education, it is beyond shameful that some private lenders are courting colleges with gifts and incentives that often do not help students or parents," said Miller, the chairman of the Education and Labor Committee. "These unethical practices abuse the trust that students and parents place in schools and lenders when they take out a loan, and undermine the credibility of the student aid system. Students should be steered towards lenders that will give them the best terms, not towards companies that send college employees on an all-expenses-paid Caribbean vacation."
Many colleges and universities maintain a "preferred lender list" used to guide students to borrow from certain lenders. In order to obtain a school's "preferred lender" status, some private lenders offer colleges goods and services, ranging from software or operation of financial aid offices to gifts such as trips to exotic locations.
The Student Loan Sunshine Act would also encourage borrowers to take out federal college loans, which carry lower interest rates, before borrowing private loans, including alternative loans and direct-to-consumer educational loans. The private student loan market has boomed in recent years, with many students taking out private loans, with greater risk and higher interest rates, before borrowing the maximum allowable amount of federal student loans.
According to the College Board, since 2001, the private loan business has grown at an average rate of 27 percent per year. Students borrowed $17.3 billion in private loans alone in the past year, which now account for 20 percent of all student loans borrowed. Interest rates on some private loans have climbed as high as 19 percent, and are often marketed to students and families who have poor or no credit histories. In contrast, federal student loans offered through the government have a much lower interest rate of 6.8 percent and if recent legislation approved by the House were to become law, federal student loan interest rates would drop incrementally until reaching 3.4 percent in five years.
"As we work to ensure that our colleges and universities remain world-class, and that all qualified students can afford to attend them, it is critical that all loan arrangements between lenders and institutions are made in the interest of helping borrowers - not the other way around," said Hinojosa, the Chairman of the Subcommittee on Higher Education, Lifelong Learning, and Competitiveness. "Students and parents deserve to have all relevant information about a lender they are borrowing significant amounts of money from - including lenders' marketing tactics and the nature of their relationships with colleges. This legislation will help ensure that lenders and schools are putting students and families first."
The Sunshine Act would clean up the relationships between student lenders and institutions by:
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Requiring full disclosure of special arrangements that lenders and institutions of higher education have to offer loan products at the institution;
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Banning lenders from offering gifts worth more than $10 to college employees, including travel, lodging, entertainment, and in-kind services that lenders provide to college financial aid officers;
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Requiring full disclosure of the reasons why an institution of higher education has selected a lender for its "preferred lender list," including any special arrangements the lender has with the school; and
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Encouraging borrowers to maximize their borrowing through the government's loan programs before taking out alternative loans and direct-to-consumer loans with higher interest rates.
The legislation would apply to all lenders that make private educational loans through universities and colleges, lenders of direct-to-consumers educational loans, and all post-secondary educational institutions that receive federal funds.
Making college more affordable and accessible for all students who want to attend is a top priority of the Democratic leadership in the new Congress. In the first month of the 110th Congress, the House voted to cut interest rates in half on federal need-based student loans and to significantly increase the maximum federal Pell Grant scholarship for students most in need.
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FOR IMMEDIATE RELEASE
Contact: Tom Kiley / Rachel Racusen
2181 Rayburn House Office Building
Washington, DC 20515
202-226-0853 |
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