WASHINGTON, D.C. – Getting into college or developing a career plan after high school can be hard. But then comes the challenge of staying out of crippling student-loan debt.
Your lender may not always have that same goal in mind, warned U.S. Sen. Sherrod Brown today as he promoted an idea he says many students can use right about now. Late March and April are when many students learn whether they have been accepted to the colleges of their choice or decide they'd rather go to a technical or career school, and when they start making decisions about how to pay, including taking out loans.
What students know – and don't know – about their school loans could cost them dearly later, ruining their credit and even making it hard to find a job. Brown has signed on as a co-sponsor of a Democratic bill that would require much fuller disclosure of the loan terms and the options, some of them unknown to students when they first borrow.
This would primarily affect the private loan industry, which is not subsidized by the federal government and therefore can charge higher rates – up to 18 percent, Brown says -- or variable interest rates.
Many students turn to private banks or other lenders when they need more money than they can get from the federal system. Yet too many also tend to get these private loans when they could still qualify for a "safer, cheaper federal loan," according to Brown.
The difference between the loans?
Private loans give less leeway to graduates who need to delay repayment as they go on to get advanced degrees. In other cases, a graduate or dropout might not earn enough to pay their student debts.
The federal loan program offers delayed payment options and income-contingent payment plans. Federal policy is based more on educating students and less on earning profits, so the government can take the money it makes from interest rates on student loans and absorb these kinds of losses or postpone the payback for other borrowers.
Private lenders are like your bank: They loaned you the money and want it back.
The bill Brown is promoting, called the Know Before You Owe Act, would require schools and private lenders to disclose these kinds of options and comparisons. It would require the lenders to clearly state a student's costs, provide an update to students at least every three months, and provide an annual student loan report to the Consumer Financial Protection Bureau, which was created by Congress in 2010 to guard against abusive loan practices.
This bill has actually kicked around since 2011, introduced in the Senate by Dick Durbin of Illinois and in the House by Jared Polis of Colorado. Both are Democrats.
The website Govtrack.us, seeking to make law-making more transparent, gives the bill a zero percent chance of passage.
To understand why, it helps to know that this is just one in a series of efforts that have already added numerous disclosures to consumers about colleges, costs, loans and graduation rates.
The federal government provides the College Navigator website for families to look up information about each school. Another searchable site promoted by the Obama White House is called the College Scorecard.
The Department of Education and for-profit schools are in constant debate about what data is valid and should be included in the College Navigator. Seemingly simple factors such as default rates and dropout rates can change dramatically if viewed over a three- or five-year period or a shorter period, for example. Viewed one way, a technical college can look like it is turning out well-trained technicians, barbers and stylists. But with a different set of data, it can look like a drop-out factory.
"What we really need is better disclosure, not more," said Noah Black, spokesman for the Association of Private Sector Colleges and Universities, which represents for-profit schools. Instead, this is "another piece of legislation to add to what we have now."
Brown said there is no risk of too much information because many people don't even know where to find it now. The loan agreements that students sign are better suited for lawyers than recent high school graduates, he said.
The Know Before You Owe Act would require the loan information be given to each student in plain language rather than leaving it to him to figure out on his own.
Kelly McVicker, 30, of Toledo, a father of three, said that would have helped him when he first took out student loans at age 17, when he started community college. He borrowed about $45,000 in all by the time he got to Ohio State University and then the University of Toledo – using both federal and private loans, he said.
With interest and late fees, the debt has ballooned to about $70,000, he said. The debt affected his credit, his ability to even buy a car and his work options, said McVicker, who said that due to a family illness and other factors, he left college three credits shy of a bachelor's degree and with a debt load that only grew.
Lee Friedman, the chief executive officer of College Now Greater Cleveland, which helps guide students, said students and parents need access to fixed rates of interest, reasonable repayment periods and flexibility if they go on to graduate school or hit financial hardships. They should not face prepayment penalties, Friedman said, and they should know what kinds of employment options and other financial aid opportunities exist – before they sign irrevocable loan papers.
"We've all faced language that is pretty easy to deceive, the way it is written" Brown said on a conference call with reporters. "We've seen it in mortgages, we're seeing it in this all too often." That's why more transparency is needed, he said.
Asked if this will add to an information overload for students, considering the databases already available, Brown said, "No, I don't think we're overloading students. There's no question there's enough information available to all of us in this society for darn near anything. The problem is the quality of the information, the presentation of it... You shouldn't have to be a lawyer" to understand what you're signing as a student.
"It goes further with what we do with for-profit schools, and how they've gotten so much federal money and the default rates are higher and the job- placement rates are lower, and all the things that come with that," Brown said. "As much as some of us want to more strictly regulate what these private, for-profit colleges are, and a huge number of conservative politicians here want to protect those interest groups, the fact is that if this were clearer and presented in understandable language, some of this would be taken care of."