Student Loan Debt: Next Economic Crisis?

As students head to college campuses around the nation, many have taken out loans to pay for their education. Tuition, room and board, and other higher education costs have continued to rise while states have reduced the funding they provide to public institutions in recent years. The Federal Reserve reported that state and local spending per college student reached a 25-year low this year, when adjusted for inflation. As a result, students end up incurring more debt. The Consumer Financial Protection Bureau estimates that the student loan debt load nationwide reached more than $1 trillion earlier this year. This debt creates a major economic impact and pressure on graduates as they enter the workforce.

Federal resources for managing student financial aid are available. Sallie Mae’s financial literacy site, CollegeAnswer.com, as well as savingforcollege.com, that focuses more on 529 plans and other state programs, provide additional guidance to encourage students to borrow only what they really need. In addition, there are other ways to avoid back to college sticker shock. Even crowdfunding has been suggested as an alternative funding source. Rural areas and small cities also offer student loan forgiveness programs to college graduates.

States have also crafted legislation concerning student loans and student lending, as these SSL bill drafts demonstrate.

Suggested State Legislation:

Student Lending Accountability, Transparency and Enforcement, an SSL draft based on New York law, prohibits lenders from making gifts, defined as having not more than nominal value, to colleges and universities and their employees, in exchange for any advantage or consideration provided such lenders related to their educational loan activities. The legislation prohibits employees of colleges and universities from soliciting, accepting or receiving gifts from lenders. It prohibits employees of colleges and universities from receiving remuneration for serving as members or participants of lenders’ advisory boards, or receiving any reimbursement of expenses for so serving.

The legislation prohibits lenders’ employees and agents from being identified as employees or agents of colleges and universities and staffing the financial aid offices of colleges and universities.

This bill requires colleges to disclose to borrowers and potential borrowers who consult a covered institution’s financial aid office, all available financing options under federal law; and prohibits lenders and colleges and universities from entering into certain quid pro quo high risk loans that prejudice other borrowers or potential borrowers toward a particular type of loan, in exchange for benefits provided to the college or university or its students in connection with a different type of loan.

This legislation prohibits a covered institution to direct potential borrowers to any electronic master promissory notes or other loan agreements that do not provide a reasonable and convenient alternative for the borrower to complete a master promissory note with any federally approved lending institution offering the relevant loan in this state.

The Act requires a lender, upon request of a college or university, to disclose the default rates, rates of interest charged to borrowers, and number of borrowers receiving those rates from such college or university.

Student Loan Protection, an SSL draft based on Iowa law, addresses conflicts of interest between colleges and representatives of financial entities which lend money to students to attend college. For example, under the Act, a lending institution must prohibit an employee or agent of the lending institution from being identified to borrowers or prospective borrowers as a college or university employee. The Act prohibits lending institution employees from staffing the financial aid or financial call center of colleges and universities. The Act also stipulates how colleges and universities list in their financial aid material institutions which offer financial aid.