BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 1289|
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THIRD READING
Bill No: SB 1289
Author: Corbett (D)
Amended: 5/3/12
Vote: 21
SENATE EDUCATION COMMITTEE : 7-1, 3/28/12
AYES: Lowenthal, Alquist, Hancock, Liu, Price, Simitian,
Vargas
NOES: Huff
NO VOTE RECORDED: Runner, Blakeslee, Vacancy
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
SUBJECT : Postsecondary education: private student loans
SOURCE : Author
DIGEST : This bill requires public, private postsecondary
or independent educational institutions, except the
California Community Colleges (CCC), to make specified
disclosures related to private student loans in financial
aid material and private loan application provided or made
available by the institution, to distinguish private loans
from federal loans in individual financial aid awards, and,
if the institution provides a private loan lender list, to
provide general information on the terms of the loan
available through the lender and disclose the reason for
each lender's inclusion on the list. This bill authorizes
and requests the CCC to comply with stated provisions of
the bill, and applies to the University of California only
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to the extent that the Regents of the University of
California Act, by resolution, to make it applicable.
ANALYSIS : 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
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.
This bill requires public, private or independent
postsecondary educational institutions except the CCC to
provide information, as specified, to students regarding
student loans. Specifically, this bill:
1. Requires all public, private or independent
postsecondary educational institutions, except the CCC
to state in all printed and online financial aid
materials distributed by the institution to applicants
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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.
2. 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 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.
3. 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/her right to choose other lenders.
4. Provides that all of the aforementioned applies to the
University of California only to the extent that the
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Board of Regents acts, by resolution, to make it
applicable.
5. CCC may, and are requested to comply with stated
provisions of this bill.
Comments
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 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
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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.
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.
Prior Legislation
SB 1355, Corbett (2008) was 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.
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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."
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
SUPPORT : (Verified 5/8/12)
American Federation of State, County and Municipal
Employees, AFL-CIO
California Faculty Association
California Student Aid Commission
Institute for College Access and Success
Western Association for College Admissions Counseling
OPPOSITION : (Verified 5/8/12)
California Association of Private Postsecondary Schools
ARGUMENTS IN SUPPORT : 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.
ARGUMENTS IN OPPOSITION : Opponents argue that this bill
on the grounds that existing federal law already covers the
proposed area of legislation. The current combination of
Truth in Lending Act requires disclosures and the USDE
financial student aid regulations disclosures apply to
private loans made by a private or public postsecondary
institution.
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PQ:do 5/9/12 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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