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New Proposal Would Force Colleges to Disclose More to Students About Borrowing Options

May 30, 2012 Jennifer Williamson, Distance Columnist | 0 Comments

Many students enter into educational debt obligations surprisingly uninformed. Some are not aware of—and never told by universities—that they are eligible for more in federal aid than they are getting. Others—approximately two-thirds, according to US Senators Dick Durbin of Illinois and Tom Harkin of Iowa—aren’t aware of the difference between federal and private student loans.

There’s no question that many colleges fail students when it comes to giving them a full picture of their financial aid obligations and eligibility. Senators Durbin and Harkin seek to change that with a recently-introduced bill, the Know Before You Owe Act of 2012. This bill would require colleges to provide better counseling and to guide students toward the most optimal financial package for them.

Specific provisions include:

Clear information about federal loans

Student Loans

Today, colleges often don’t provide students with the information they need to make informed decisions about their student loans.



Under the new law, online colleges and universities would be required to tell students if they have any federal loan eligibility that’s currently going untapped. In some cases, students apply for private loans before applying to federal aid—and thus have no idea how much federal aid they could qualify for when making student loan decisions.  


The private lender would be required to confirm with the school the student’s status of enrollment, the full cost of attendance, and the estimated assistance from federal financial aid before any private loans are approved. This way, students will not be signed up for private loans in excess of what they’re eligible to borrow, and the school would be required to inform students if they are eligible for more in federal aid.

Clear quarterly updates

The student would receive quarterly updates regarding accrued but unpaid interest as well as capitalized interest. This would allow students to stay informed about their student loan and interest situation while they’re in school.

Up-front information

Schools would be required to inform students about their full federal financial aid eligibility and their ability to select any private lender. This is key, because many schools provide a list of “preferred lenders” and encourage students and their families to choose from that list. While this can result in better rates in some cases, it can also keep families from investigating all their options. In addition, students would be informed of the effect a private loan could have on their eligibility for other types of financial aid, and their legal right to accept, cancel, or reject a private loan.

Terms and conditions

The school would have to provide clear information regarding the terms and conditions of both federal and private student loans. This could be crucial in helping students understand the difference between the two.

While most federal student loans have fixed interest rates that are limited to 6.8%, private loans are variable and have considerably higher interest rates. Private loans have no built-in default protections such as deferment or Income-Based Repayment options, and students who default on a private loan can seriously mar their credit record. While both private and federal loans cannot be eliminated through bankruptcy, private student loans come with much more onerous terms—and can be more difficult to repay.

Today, colleges often don’t provide students with the information they need to make informed decisions about their student loans. This bill would ideally help students understand the difference between private and federal student loans—and know what they’re getting into before signing up for any loan. Hopefully, if it passes, this bill would make colleges more responsible for ensuring students don’t get in over their head with their student loans—and don’t make any financial decisions that could severely affect their lives after graduation.


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