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Private student loan lenders may encourage borrowers to take on more debt: DOE

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  • Private student loan financing options can often cause borrowers to take on more debt than they can afford.
  • The federal office of student aid released the disclosure requirements for private lenders on Wednesday.
  • The FSA has reminded lenders and schools that they must inform borrowers of the risks associated with loans.

President Joe Biden’s Department of Education wants to make sure colleges take all necessary steps to prevent students from accepting debt options they can’t afford to repay.

On Wednesday, the federal Office of Student Aid (FSA) released a blog post detailing requirements for colleges to better educate students about the risks of private student loan options that can incur costly fees.

Rich Williams, chief of staff for the Office of Post-Secondary Education, wrote in the post that “the stakes couldn’t be higher” for students as they figure out how to pay for their college education, but often these students have been misled into debt. with high fees that were in the best interest of the lender, not the borrower.

“Without guardrails, these financial incentives can create conflicts of interest that can incentivize students to use financial products – branded with trusted university logos – that have high or unusual fees and less consumer protection than other financial products. ‘other products widely available,’ Williams wrote. “Expensive financial products can leave many vulnerable students even more in debt, and unexpected fees can threaten their path to graduation.”

Since private student loans are not funded by the government, lenders can often provide financing options to borrowers with little oversight, resulting in debt with very high interest rates that is difficult to repay. But, as the Higher Education Act 1965 states, lenders making private loans, as well as schools involved in such arrangements, are required to “make specific disclosures to borrowers of such loans, to communicate related information to the Department and to comply with essential protections”. and prohibitions against conflicts of interest,” according to the FSA.

Education Undersecretary James Kvaal said the Department of Education, together with the CFPB, will continue to ensure colleges and lenders comply with loan disclosure requirements.

“These are important protections for borrowers,” Kvaal said. “We and @CFPB will monitor the actions of the colleges.”

Crack down on revenue sharing agreements

Revenue Sharing Agreements (ISAs) are an example of the types of private student loans that have come under scrutiny in recent years. An ISA funds student loans by requiring a borrower to commit a certain portion of their income to the lender in exchange for money to pay for their college education.

But last year, the Consumer Financial Protection Bureau issued a consent order against an ISA provider for misrepresenting its product by saying the money it gave to borrowers was not a loan and therefore not affected by consumer protection law.

The Ministry of Education is now tackling this loophole further. Williams wrote that Wednesday’s announcement from the FSA clarifies that ISAs are private education loans “for purposes of the Department’s rules on agreements with preferred lenders,” to avoid confusion about the rules that these lenders must follow.

The announcement also ensures that borrowers are informed of their options, that they can choose their lender and that the loan process is transparent and in the best interest of the borrower, according to the FSA.

Mike Pierce, executive director of the Student Borrower Protection Center, wrote on Twitter that the announcement was “taking a LONG time coming”.

“These rules have been written on the books to protect students from exactly the kind of deals that are central to the ISA model and the fintech/edtech industry in general,” he wrote. “For years and years, schools and lenders have been able to choose to ignore the law. It ends now.”

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