With American families facing a more than $1 trillion avalanche of student loan debt, Congressman Tim Bishop joined Congressman Jared Polis of Colorado and Congresswoman Allyson Schwartz of Pennsylvania introduced the Know Before You Owe Act, which would ensure that student borrowers know about the advantages of taking out lower cost federal loans before borrowing in the private market. According to the Consumer Financial Protection Bureau (CFPB), 40 percent of students with private loans have not exhausted all of their federal loan options, which come with interest rates as low as 3.4 percent compared to an average of 7.8 percent for private loans.
"The vast majority of students need to take out loans to attend college and pursue their dreams, but students should not have to take on one more penny in debt than is absolutely necessary," said Bishop. "This critical legislation will ensure that students have the information they need to evaluate their options for higher education financing and decide which option is best for them--not for the lender."
"Families and students who are already struggling and saving to afford college should have more affordable loan opportunities made clear to them before they go to the more expensive private market," said Polis. "Through simple coordination and disclosure, we can save student loan borrowers billions of dollars and make their education more affordable."
"Families and students alike know that higher education is one key to being able to succeed in a competitive 21st century job market -- and they are willing to invest in their future by taking out student loans in order to afford college," Schwartz said. "We need to ensure that students have full and complete information about the most affordable student loan options available, and fight back against those who may try to take unscrupulous advantage of families facing tough financial decisions."
There is a distinct and expensive difference between federal student loans and those offered on the private market. Federal student loans have fixed interest rates and reasonable repayment terms, including deferment of repayment for hardships and forgiveness in exchange for service, such as teaching in low-achieving schools.
In addition to having higher interest rates, private loans lack protections offered by federal loans, come with variable rates, large fees, and are ineligible for federal forgiveness, cancellation or repayment programs. Two-thirds of private loan borrowers, including those who took out both private and federal loans, said that they did not understand the major differences between private and federal options.
The Know Before You Owe Act would require private lenders to:
· Certify with the borrower's school that the student is enrolled and the amount the student is eligible to borrow before issuing a private loan.
· Provide the borrower with quarterly updates on their loans, including accrued but unpaid interest and capitalized interest.
· Report information to the Consumer Financial Protection Bureau about their student loans.
This bill would require institutions of higher education to:
Inform students about (1) their federal financial aid availability and eligibility, (2) their ability to select a private lender of their choice, (3) the impact of a private loan on their eligibility for other forms of financial aid, (4) their right to accept, reject or cancel a private loan as allowed under current law, and (5) the terms and conditions of federal and private student loans.
The Senate companion was introduced by Senators Dick Durbin of Illinois and Tom Harkin of Iowa.