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The hardest lesson too many college students are learning is the true cost of their federal student loans when the bill from Uncle Sam comes due. Unlike disclosures from private lenders for mortgages, car loans and student loans, the U.S. Department of Education withholds critical financial information meant to inform borrowers of loan terms before funds are provided. Meanwhile, the Consumer Financial Protection Bureau – the agency tasked with protecting and educating financial consumers – has sat idly by as the department continues to conceal the true cost of federal student loan debt. The result has left many students and families uninformed about how much paying for college will set them back financially. It is up to the next administration to finally make “know before you owe” a reality for federal student loans.
Policymakers and regulators have been diligently working to find solutions to stem the growing student loan debt burden but fail to address one of its root causes. Rather than give borrowers information needed to make sound financial decisions before they take out federal student loans, they focus almost exclusively on helping borrowers after they are already up to their backpacks in debt.
A new administration and Congress can change this.
By law, private student lenders, including several of the Consumer Bankers Association’s member banks, are required to provide customers with clear and conspicuous disclosures of loan costs and terms before loans are disbursed. The interest rate, loan fees, annual percentage rate and monthly payment amount, among other important terms specific to the individual borrower, are boldly displayed. In addition, borrowers can view the total cost of the loan they are agreeing to repay, allowing them to make informed decisions. Sadly, the Department of Education’s disclosures lack clarity and leave out critical information, rendering them ineffective for borrowers seeking to understand their financial commitments.
When receiving a federal loan, borrowers must weed through more than a dozen pages of fine print to unearth some of the key loan terms. On the other hand, private lenders are required by law to “conspicuously” supply this information prior to disbursement. To make matters worse, federal student loan disbursement disclosures fail to provide terms specific to individual borrowers, instead offering broad categories of interest rates and fees and ranges of estimated monthly payments. Nowhere on these forms is the borrower provided information on the total expected cost of the loans they are committing to repay. Unfortunately for these borrowers, the government has failed to take its own advice, which it has generously doled out to the private sector during the Obama administration. It is time we demand the same transparent process from the Department of Education as we do from private industry.
The CFPB has been on a mission to simplify private loan disclosures, yet it has turned a blind eye to the Department of Education’s predatory lending practices. Beginning in 2015 with the CFPB’s implementation of the “know before you owe” mortgage initiative, mortgage originators have been required to clearly and concisely explain to borrowers the real cost of buying a $300,000 home. On just a few sheets of paper, a borrower can see the loan fees, annual percentage rate, estimated monthly payment and total payments in large, easy to read print. This consumer friendly disclosure empowers borrowers to truly understand their loans and avoid too much debt. Auto lenders must follow a similar approach when disclosing the costs of a loan to potential car buyers.
If clear disclosures are best for consumers buying a home or a car or using private financing for an education, why hasn’t the CFPB asked for the same approach from the Department of Education?
Without a doubt, a college education can be one of the best investments a family will make. With 59 percent of American jobs requiring a postsecondary degree, higher education is required to compete in the marketplace. But this investment can come at a tremendous cost. Over the last four decades, college tuition and fees have risen more than 1,100 percent, far outpacing inflation and even medical costs.
The snowballing expense to attend one of America’s colleges and universities – partly attributed to the expansion of the federal student loan programs – has resulted in $1.3 trillion in student loan debt, nearly 93 percent of which is federal loan debt held by the Department of Education. In other words, you, I and every other American taxpayer will foot the bill if borrowers fail to repay. Over the past year, one American has defaulted on their student loan every 28 seconds. With the average student debt for the class of 2016 just over $37,000, student loan debt will continue to pile up, with many borrowers struggling to repay and taxpayers often on the hook.
A recent analysis of New York Federal Reserve and Department of Education data showed at the beginning of the year more than 40 percent of federal student loan borrowers were either behind on their payments or not making any at all. About one in six borrowers were in default, having gone more than a year without making a payment. Meanwhile, members of Congress touted refinancing proposals and regulators demanded increased marketing of income-based repayment options. While well intentioned, these efforts possess the backward logic of addressing the results of the problem rather than its causes.
The federal government must do better. Until students and families are provided with clear disclosures, too many borrowers will be surprised to learn the full cost of their federal student loans. The Department of Education and the CFPB – whether on their own or mandated by Congress – must work together to provide federal student loan borrowers the same kind of concise, meaningful information about their future obligations before they owe as do private lenders. Only then will students and their families have a chance at successfully repaying their loans and achieving the American dream.
Richard Hunt is president and CEO of the Consumer Bankers Associations, the only trade association focused exclusively on consumer banking, representing nearly 70 members whose products and services provide access to credit for consumers and small businesses.
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