More Regulation for Private Student Loans

A clause buried in the 2008 renewal of the Higher Education Act could portend big changes for regulation surrounding private student loans.

Section 1031 of the Act (HR 4137) outlines a desire for each of the various regulatory agencies to determine how examiners will affirmatively judge private loan companies that make low-cost private student loans. The language is relatively vague and appears to leave most of the heavy lifting for the interpretation of the agencies.  In fact, it gives those agencies a year to make their decision on how to operationalize the new rules.  Still, time is running out.  The bill passed in August of 2008.

The bill also includes language that specifies how the Truth-In-Lending Act would apply to private student loans.  In Title X of the bill, which is subtitled “Private Student Loan Transparency and Improvement Act of 2008,’” HR 4137 asks the Federal Reserve to come up with final rules for this decision.  Among the areas to be covered:

• no more partnerships that promote a conflict of interest.  For example, the CompuCredit-HBCU partnership might be an example of a business deal that sacrificed the interests of students for those of schools and a lending institution.  The rules go from no gifts to no revenue sharing.
• Sec. 1021- More disclosures, including the maximum potential interest rate that a loan could potentially reach, the lifetime cost of the loan, its terms and length, and the right to cancel the loan agreement within a temporary period.

These wrinkles could be significant, especially as the rules on the Community Reinvestment Act are updated in the next few months.  The private student loan market is virtually shut off right now, because there is no demand from investors for securities backed by those loans.  However, in the event that credit does begin to flow again, private student loans are likely to return to their ways.  They were growing in popularity, as more students exhausted their federal student loans in order to meet the ever-increasing growth in tuition at our nation’s universities and colleges.