+

Cookies on the Business Insider India website

Business Insider India has updated its Privacy and Cookie policy. We use cookies to ensure that we give you the better experience on our website. If you continue without changing your settings, we\'ll assume that you are happy to receive all cookies on the Business Insider India website. However, you can change your cookie setting at any time by clicking on our Cookie Policy at any time. You can also see our Privacy Policy.

Close
HomeQuizzoneWhatsappShare Flash Reads
 

Biden's Education Department is cracking down on private student-loan lenders that steer 'vulnerable' borrowers 'deeper in debt'

Mar 3, 2022, 00:16 IST
Business Insider
Getty Images
  • Private student loan financing options can often lead borrowers into more debt than they can afford.
  • The Federal Student Aid office published disclosure requirements for private lenders on Wednesday.
Advertisement

President Joe Biden's Education Department wants to make sure colleges take every step in preventing students from taking on debt options they cannot afford to pay off.

On Wednesday, the Federal Student Aid (FSA) office published a blog post detailing requirements for colleges to better inform students about the risks of private student-loan options that can carry costly fees.

Rich Williams, chief of staff of the Office of Postsecondary Education, wrote in the post that "the stakes could not be higher" for students when they figure out how to pay for college, but oftentimes, those students have been misled into taking on debt with high fees that was in the best interest of the lender, not the borrower.

"Without guardrails, these financial incentives can create conflicts of interest that may drive students to use financial products—branded by trusted college logos—that have high or unusual fees and fewer consumer protections than other widely available products," Williams wrote. "Expensive financial products can leave many vulnerable students deeper in debt, and unexpected fees can threaten their path toward graduation."

Since private student loans are not funded by the government, lenders can often give financing options to borrowers with little oversight, resulting in debt with very high interest rates that are difficult to pay off. But, as the Higher Education Act of 1965 stated, lenders that make private loans, along with schools involved in those arrangements, are required to "make specific disclosures to borrowers of those loans, report related information to the Department, and comply with critical protections and prohibitions against conflicts of interest," per FSA.

Advertisement

Under Secretary of Education James Kvaal said that the Education Department, along with the CFPB, will continue to ensure colleges and lenders are complying with loan disclosure requirements.

"These are important protections for borrowers," Kvaal said. "We and @CFPB will monitor colleges' actions."

Cracking down on Income-Share Agreements

Income-share agreements (ISAs) are one example of the kinds of private student loans that have come under scrutiny in recent years. An ISA finances student loans by requiring a borrower to pledge a certain portion of their income to the lender in exchange for money to pay for college.

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

The Education Department is now further cracking down on that loophole. Williams wrote that FSA's Wednesday announcement clarifies that ISAs are private education loans "for the purposes of the Department's rules on preferred lender arrangements," as to avoid confusion on the rules those lenders must follow.

Advertisement

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

Mike Pierce, executive director of the Student Borrower Protection Center, wrote on Twitter that the announcement "was a LONG TIME coming."

"These rules have been on the books to protect students from exactly the sort of deals central to the ISA model and the fintech/edtech industry broadly," he wrote. "For years and years, schools & lenders could choose to ignore the law. That ends now."

You are subscribed to notifications!
Looks like you've blocked notifications!
Next Article