BILL ANALYSIS Ó
SENATE COMMITTEE ON EDUCATION
Alan Lowenthal, Chair
2011-2012 Regular Session
BILL NO: SB 1289
AUTHOR: Corbett
INTRODUCED: February 23, 2012
FISCAL COMM: Yes HEARING DATE: March 28, 2012
URGENCY: No CONSULTANT:Daniel Alvarez
SUBJECT : Postsecondary Education: private student loans.
SUMMARY
This bill requires public or private postsecondary
educational institutions to provide information, as
specified, to students regarding student loans.
BACKGROUND
Existing law provides, under federal law, for several types
of federal student loans through the William D. Ford
Federal Direct Loan Program, administered by the Federal
Student Aid Office within the United States Department of
Education (USDE), including:
1) Subsidized Stafford Loans: These are needs-based
loans that cover the difference between a student's
resources and the cost of attending a college or
university, the amount of loan is dependent on the
level of need, dependent status, and year in college.
The federal government pays the interest while the
student is attending the college or university and
subsidizes the interest throughout the life of the
loan.
2) Unsubsidized Stafford Loans: Not based on financial
need, these loans generally cover the difference
between the subsidized Stafford Loan and the total
cost of attending college. Loans are made by private
lending institutions and repayment is guaranteed by
the federal government. The federal government sets
the interest rates and fees.
3) PLUS (Parent Loans for Undergraduate Students) are
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available to creditworthy parents of dependent
students. These are not needs-based and are federally
guaranteed. In addition, these types of loans have
been expanded for graduate or professional degree
students. The borrower is responsible for paying the
interest on PLUS loans during all periods, starting
from the date the loan is first disbursed.
ANALYSIS
This bill requires public or private postsecondary
educational institutions to provide information, as
specified, to students regarding student loans.
Specifically, this bill:
1) Requires all public or private postsecondary
educational institutions to state in all printed and
online financial aid materials distributed by the
institution to applicants for admission or
matriculated students and on private loan applications
provided or made available by the institution all of
the following:
a) Private loans are not guaranteed by the
federal government.
b) Private loans may cost more than federal
loans.
c) Federal Direct loans are available to
students regardless of income.
1) Requires institutions to clearly distinguish private
loans from federal loans in individual financial aid
awards by stating, for any private loans offered by
the institution as a part of the institution's award
package, all of the following:
a) The range of interest rates that may be
charged on the private loan.
b) Whether the rate is fixed or variable.
c) If the interest rate is variable, the
frequency of rate changes, the explanation of
that rate change, and, if applicable, the maximum
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interest rate increase.
d) Any and all fees associated with the
assumption of the loan.
e) An explanation that the interest rate on a
private loan may depend on the borrower's credit
rating.
1) Requires institutions for any private loan lender list
provided, to include general information on the terms
of the loan available through the lender and disclose
the reason for each lender's inclusion on the list.
Requires the institution to inform the student of his
or her right to choose other lenders.
2) Provides that all of the aforementioned applies to the
University of California only to the extent that the
Board of Regents acts, by resolution, to make it
applicable.
STAFF COMMENTS
1) Need for the bill . According to the author's office,
the growing cost of higher education, especially
during tough economic times, means that more students
will rely on student loans to pay for tuition and
other necessities while in school. Unfortunately
family incomes and student aid programs have not
increased at the same pace, requiring students to take
on larger amounts of debt. By providing students with
information regarding loan options and risks, as
proposed in this measure, students can make informed
qualitative decisions about student loans, reducing
the likelihood they will run into additional
unforeseen consequences.
2) California Data and National Trends . According to
data from the Project on Student Debt, students who
graduated from public and private non-profit four-year
universities in California in 2010 had an average of
$17,326 in student debt. However, that data is
limited because it doesn't include any for-profit
institutions, some nonprofit colleges did not report
their student debt data, and the data looks only at
graduates - not counting students who take out student
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loans and never earn a degree.
More broadly, the College Board's Trends in Student
Aid 2011 estimates that in 2009-10, nationwide about
55 percent of public four-year college students who
graduated from the institutions at which they began
their studies graduated with debt. They had borrowed
an average of $22,000. About two-thirds of those
earning bachelor's degrees from private nonprofit
institutions had debt averaging $28,100.
While federal loans make up the majority of student
loan borrowing, there are limits to how much money
students can borrow under federal loan programs; the
remaining "unmet need" to cover total educational
expenses are often financed through private loans.
These private loans often carry higher interest rates
and less favorable terms than government loans. For
example, federal loans have fixed rates with set caps,
limits on origination fees, and flexible repayment
options. In contrast, private loans are more likely
to have higher variable rates, no caps on origination
fees, and strict repayment rules with few options for
distressed borrowers.
The Federal Reserve of San Francisco's Student Debt
and Default in the 12th District, indicates the share
of private loans increased rapidly from 2000 through
2007, consistent with the broader trends of easy
credit during the housing boom. At their peak,
private loans made up 26 percent of the total student
loans in the 20062007 academic year, for a total of
$22.6 billion. Students whose parents earned less
than $36,000 accessed private loans at roughly the
same rate as students whose parents earned more than
$105,000 for the 20072008 school year. Private loan
activity began to diminish in 2008, consistent with
tighter credit conditions across all sectors, but they
still accounted for $7.9 billion in 20102011. The
recent difficulties facing credit markets in general,
combined with increases in the availability of federal
student loans are reflected in diminished use of
private education loans. There is no reliable source
for exact information on total borrowing from these
sources.
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3) Federal law, HR 4137. The federal government in 2008
enacted the Higher Education Opportunity Act with the
intent of improved disclosures for private education
loans. HR 4137 amended the federal Higher Education
Act of 1965 to prohibit private education loans from
being consummated before applicants submit a signed
self-certification form that institutions of higher
education provide to students, informing applicants of
the availability of, and their possible eligibility
for federal, state, and institutional student aid.
The form's purpose is to ensure an applicant does not
borrow more than needed. Information required to
complete this form includes total cost of attendance
(including tuition, fees, room & board, etc.);
estimated amount of financial aid; and the difference
between the total cost and estimated financial aid.
Borrowers need to submit the self-certification prior
to receiving a private or direct student loan.
4) Prior legislation . SB 1355, Corbett (2008) was a
measure very similar to this bill. The bill was vetoed
by then Governor Schwarzenegger with the following
veto message:
"?recently enacted federal legislation (H.R.
4137) makes changes to the Federal Family
Education Loan program, requiring more
comprehensive lender disclosures and consumer
education of students and families than this
bill, particularly as budgeting and financial
management relates to student loan programs. The
federal legislation also imposes new restrictions
on private lenders and education institutions in
order to address concerns related to unfair
lending practices and conflicts of interest.
Therefore, given the comprehensive nature of the
federal reforms recently enacted, I am unable to
sign this bill at this time."
SUPPORT
California Student Aid Commission
OPPOSITION
None on file.
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