KENNEDY, DURBIN INTRODUCE BILL TO PREVENT EXPLOITATION OF STUDENTS BY PRIVATE LENDERS

Student Loan Sunshine Act Bans Lender Gifts, Requires Greater Disclosure of Lender Arrangements with Colleges and Universities

February 1, 2007

FOR IMMEDIATE RELEASE

Washington, D.C. -- Today, U.S. Senators Edward M. Kennedy (D-MA) and Richard J. Durbin (D-IL) introduced the “Student Loan Sunshine Act,” which aims to protect students and parents from exploitation by private lenders and lenders who offer gifts to colleges as a way to secure loan business.

The introduction of the Sunshine Act follows recent reports detailing the aggressive and highly questionable tactics some lenders are using to market private loans and court the favor of colleges and universities to offer such loans to their students. It also responds to the rapid growth in the use of private loans in recent years -- such as “alternative loans” that lenders offer through schools, and direct-to-consumer private educational loans. According to the College Board, the total volume of private student loans has grown at an average rate of 27 per year since 2001, and now totals $17.3 billion, or 20 percent of all student loan volume. Some private loans carry interest rates as high as 19 percent – compared to 6.8 percent for loans made through the government’s loan programs – and often are marketed to students and families with poor or no credit histories.

“Going to college is hard enough. Students shouldn’t have to worry about being exploited when they take out student loans,” said Senator Kennedy. “It’s obvious that some lenders are pulling out all the stops to woo colleges into offering their loan products. These inducements may be legal, but they’re wrong. They get in the way of providing students and their families with the help they need to afford college. At a time when students and families are turning to private and alternative loans more than ever, we need to make sure they’re being offered under the best terms possible, not because a lender has sought to make a sweetheart deal with a school.”

“We need to shine a bright light on the incentive-based relationships that exist between some universities and lenders. We want college officials to look out for the interests of their students instead of looking forward to the next gift or all-expenses paid exotic vacation,” said Senator Durbin, who has called for an Inspector General investigation into potential conflict of interest between lenders and universities. “Before signing on the dotted line, students and their families should have all the facts and should feel confident that they're receiving the best deal on their college loan. The first obligation of any college or university is to help its students, not the lenders.”

The Sunshine Act:
· Requires full disclosure of special arrangements that lenders and institutions of higher education have to offer loan products at the institution;
· Bans 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 offices;
· Requires 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;
· Encourages 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 Sunshine Act applies to all lenders that make private educational loans through colleges and universities, as well as lenders of direct-to-consumer educational loans. The provisions of the Act also apply to all post-secondary educational institutions that receive Federal funds.

Student Loan Sunshine Act
Senators Edward M. Kennedy and Richard J. Durbin

The Student Loan Sunshine Act protects students and parents from exploitation by private lenders and lenders who offer gifts to colleges as a way to secure loan business. It requires full disclosure of special arrangements that lenders and colleges have to offer loan products at the college; bans lenders from offering gifts over $10 to college employees; and encourages borrowers to maximize their borrowing through the government’s loan programs before taking out private loans with higher interest rates.

The Student Loan Sunshine Act Protects Students and Families by:

Ending Inappropriate Lender Practices.

• The Act prohibits lenders from offering any gift worth more than $10 to a college employee, including free or discounted trips, meals, invitations to entertainment events or other form of hospitality.
• It also prohibits lenders from offering services to financial aid offices that create a conflict of interest, such as lending staff during peak loan processing times.
• It prohibits lenders from entering arrangements with colleges that require the college to “brand” the lender’s loan product with the college’s emblem or logo.
  

• The Act requires lenders to report any special arrangements they have with colleges to make loans to the Secretary of Education, including the terms of the arrangement related to marketing, recommending, endorsing student loans, and any benefit, direct or indirect, provided to or paid to any party in connection with the loan arrangement.
• The Act requires the Secretary of Education, together with members of the higher education community and students, to develop a clear, easy-to-use model format for reporting the terms and conditions of student loans, similar to the APR disclosure required for other types of loans.
• The Act requires colleges’ preferred lender lists to: include at least three non-affiliated lenders; clearly and fully disclose why the college has identified a lender as a preferred lender; and state that students do not have to borrow from the preferred lender list.
  

• The Act requires all lenders of direct-to-consumer private educational loans to clearly and prominently state that borrowers may qualify for low-interest loans through the Federal government’s loan programs. It also requires these lenders to clearly disclose how the interest rate is determined; sample loan costs disaggregated by type; information on any and all fees; information on collection in the case of default; and information on Better Business and state consumer agency or state attorney general complaints against the lender and their resolution.
• Before a DTC lender can offer an education loan of more than $1000, the Act requires the lender to notify the borrower’s college of the amount of the proposed loan, so the school can advise the borrower if the loan exceeds what’s necessary to cover the student’s cost of attendance after other aid sources are factored in.
• The Act bars lenders from offering a private loan through a college (also known as an “alternative loan”) until the college has informed students and parents of all their options for borrowing under the government’s Title IV loan programs -- including information on any terms and conditions of Title IV loans that are more favorable than the private loan.
  

• Private student loans now total $17.3 billion, and have grown at an average rate of 27 percent per year since 2001. In 2001-02, private loans accounted for 12 percent of total education borrowing; in 2005-06, they accounted for 20 percent. Unlike loans offered through the federal government’s loan programs, private loans frequently carry much higher interest rates, especially for students without credit histories and families without strong credit ratings.
• Some lenders are increasingly using questionable methods to market private loans to students and their families and court the favor of colleges and universities. For example:
  
  • The private loan company Loan to Learn invited college officials and their spouses to attend an all-expenses paid “education conference” in the West Indies.
  • The private loan company Student Loan Xpress has offered 100% loan approval at colleges if the college agrees to “brand” the private loan with the college’s name and emblem – making the loan appear to be offered by the college, not the private lender.
  • Other private loan companies encourage borrowers not to fill out the Free Application for Federal Student Aid (FAFSA) -- which allows borrowers to obtain loans at lower interest rates – while not prominently disclosing the fact that private loan interest rates are typically much higher.
    

• Lenders who participate in the government’s Federal Family Education Loan (FFEL) program also engage in questionable tactics, like offering “educational conferences” at luxury hotels, and offering college officials free entertainment and tickets to sporting events. Many lenders offer their staff to work in financial aid offices during peak loan processing times, print materials for financial aid offices – and even e-mail students on behalf of the financial aid office.
  

• Most colleges maintain “preferred lender” lists and encourage students to borrow from the list. While some colleges use a rigorous process to ensure that these preferred lenders offer the best loan terms and conditions to students, others don’t – and many preferred lender lists don’t clearly state why the lenders has earned “preferred” status. Some preferred lender lists don’t offer a real choice of lenders at all – because all the names on the list are subsidiaries of the same big lender.

Press Contact

Melissa Wagoner (202) 224-2633

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