Regulating Private Student Loans
Exhorted by consumer groups, the Obama administration and its Democratic allies in Congress are moving to create a federal Consumer Financial Protection Agency, which is designed to regulate credit card fees and other forms of consumer credit that get comparatively little oversight from existing federal agencies. Advocates for students have argued that the new agency could fill what they say are significant gaps in the government's ability to regulate non-federal student loans, which grew steadily in popularity as college tuitions rose throughout this decade. But as the House of Representatives drafts its version of legislation to create the new agency, a broad coalition of groups are concerned that lawmakers may ignore a burgeoning form of alternative loans: those that for-profit colleges make directly to students to fill gaps in their ability to pay.
They are urging Congressional Democrats to clarify that a planned exemption in the bill designed to shield local merchants from excessive regulation would not apply to publicly traded higher education companies that are directly giving students tens of millions of dollars in small loans, often structured as consumer financing rather than student loans, and sometimes at double digit interest rates.
"To effectively protect consumers, the CFPA must have full authority to regulate private student loans regardless of the institution offering them," the groups wrote in a letter this month to Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee. "For consumers, a private student loan can pose the same serious risks whether issued by a financial institution or by a school. The CFPA should apply and enforce standards based upon the product and not the issuing institution."
For-profit college officials say the groups misrepresent the nature of the loans, which they say are designed to fill the gap (often as little as $1,000) between the federal aid the students qualify for and the cost of their educations, funds that have been harder for students to come by since the tightened credit markets crimped the availability of other private student loans. They also point out that relatively few colleges provide such financing, and argue that private student loans -- including those issued by institutions -- are already regulated, thanks to changes made in last year's renewal of the Higher Education Act. [Inside Higher Ed]
