BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 1289
                                                                  Page  1

          Date of Hearing:   June 19, 2012

                       ASSEMBLY COMMITTEE ON HIGHER EDUCATION
                                 Marty Block, Chair
                     SB 1289 (Corbett) - As Amended:  May 3, 2012

           SENATE VOTE  :   25-11
           
          SUBJECT  :   Postsecondary education: private student loans.

           SUMMARY  :   Requires a public, private, or independent 
          postsecondary educational institution, except the California 
          Community Colleges (CCC), to make specified disclosures related 
          to private student loans in financial aid material and private 
          loan applications provided or made available by the institution. 
           Specifically,  this bill  :   

          1)Requires that a public, private, or independent postsecondary 
            educational institution, except CCC, shall state all of the 
            following in all printed and online financial aid materials 
            issued or distributed by the institution to applicants for 
            admission or matriculated students and with private loan 
            applications provided or made available by the institution:
             
             a)   Private loans lack flexible repayment options and 
               borrower protections that federal loans are required to 
               provide,
             
            b)   Private loans may cost more than federal loans, and,
             
            c)   Federal direct loans are available to students regardless 
          of income.

          2)Requires that institutions clearly distinguish private loans 
            from federal loans in individual financial aid awards by 
            stating, for any private loans included by the institution as 
            part of the institution's award package, all of the following:

            a)   Whether the rate is fixed or variable,
               
             b)   An explanation that private loan interest rates may be 
               higher than federal loan interest  rates and may increase 
               over time through no fault of the borrower,

             c)   That there is no legal limit to the interest rate that 








                                                                  SB 1289
                                                                  Page  2

               borrowers may be charged on private loans,
               
            d)   Any and all fees associated with the assumption of the 
          loan, and,

            e)   An explanation that the interest rate on a private loan 
            may depend on the borrower's credit rating.

          3)Requires that, if the institution provides a private loan 
            lender list, it also shall 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, as well as 
            the student's right to choose other lenders.

          4)Requests that the CCC comply with the provisions of this 
            legislation.

          5)Clarifies that the provisions of this legislation apply to the 
            University of California (UC) only to the extent that the 
            provisions are adopted by the UC Regents through a resolution.

           EXISTING LAW  :  Several programs for student loans have been 
          established under federal law through the William D. Ford Direct 
          Loan Program, which is operated by the U.S. Department of 
          Education's Federal Student Aid Office. These loan programs 
          include:

           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)  :  Available to 
            creditworthy parents of dependent students. These are not 
            needs-based and are federally guaranteed. In addition, these 








                                                                  SB 1289
                                                                  Page  3

            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.

          Before July 1, 2010, Stafford, PLUS, and Consolidation Loans 
          were also made by private lenders under the Federal Family 
          Education Loan Program.  As a result of the Health Care and 
          Education Reconciliation Act of 2010, all new Stafford and PLUS 
          Loans come directly from the Department of Education under the 
          Direct Loan Program.

           FISCAL EFFECT  :   The Senate Appropriations Committee determined 
          that there was either no cost to the state or minimal costs, 
          pursuant to Rule 28.8.

           COMMENTS  :    Background  .  The cost of higher education has 
          unquestionably increased over the last decade, forcing students 
          to take out increasingly high levels of debt to finance their 
          education. The College Board's Trends in Student Aid 2011 report 
          notes that over the decade from 2000-01 to 2010-11, 
          undergraduate borrowing increased by 56% per full-time 
          equivalent student.   In California, cuts to public higher 
          education institutions have had an impact on how students 
          finance college and where they choose to attend school.  In June 
          2012, the Public Policy Institute of California issued, 
          Defunding Higher Education, which found that, from 2007-2011, 
          fees at the California State University increased by 47% and by 
          50% at the University of California.  
           
          Federal vs. private loans  .  Students have two options when 
          looking to take out loans - federal loans and private loans.  
          Federal loans, like Stafford Direct Loans, have fixed rates with 
          set caps, limits on fees, and flexible repayment options.  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.

          The Institute on College Access and Success (TICAS) writes in 
          "Private Loans: Facts and Trends" that "private student loans 
          are one of the riskiest ways to finance a college education." 
          According to TICAS, like credit cards, private student loans 
          usually have variable interest rates that are higher for those 
          who can least afford them - as high as 18% in 2008.  But unlike 








                                                                  SB 1289
                                                                  Page  4

          credit card debt, these loans are nearly impossible to discharge 
          in bankruptcy.  Private student loan borrowers are also not 
          eligible for the important deferment, income-based repayment, or 
          loan forgiveness options that come with federal student loans.  

          According to the College Board's Trends in Student Aid 2011, 
          private loans, which are not part of the student aid system and 
          do not involve subsidies, grew from $5.1 billion in 2000-01 to 
          $22.1 billion in 2007-08.  Since that year, student loan volume 
          from banks, credit unions, and other private lenders has 
          declined to $6 billion.  The College Board also notes that, in 
          2009-10, nationwide about 55% of graduates from public four-year 
          colleges graduated with debt, borrowing an average of $22,000.  
          About two-thirds of those earning bachelor's degrees from 
          private nonprofit institutions had debt averaging $28,100.

           Need for this bill  .  According to the author, consumers, 
          especially students without parental support and parents whose 
          first child is headed to college, lack readily accessible and 
          understandable information about the cost of a college 
          education.  They also lack unbiased, expert advice on the best 
          way to borrow money to finance their education.  The author 
          notes that Finaid.org reports that private student loan volume 
          is expected to return to the 25% annual growth rate unless there 
          is another increase in federal loan limits or an expansion of 
          the availability of federal student loans.  According to the 
          author, if current trends continue, annual private education 
          loan volume will surpass federal student loan volume by around 
          2030. 

           Federal disclosure requirements  .  In 2008 the federal government 
          enacted the Higher Education Opportunity Act (HR 4137), which 
          prohibits private education loans from being consummated before 
          applicants submit a signed self-certification form that 
          institutions of higher education provide to students.  The 
          private education loan self-certification form contains numerous 
          disclosures, including information that free federal aid might 
          available in addition to, or in the place of, a private 
          education loan.  This form also strongly encourages students to 
          pursue free or lower-cost financial aid through an institution's 
          federal financial aid office.  The private self-certification 
          must also include the estimated total cost of attendance, the 
          financial assistance for the period covered by the loan, and the 
          difference between the total cost and estimated financial aid.  
          Borrowers need to submit the self-certification prior to 








                                                                  SB 1289
                                                                  Page  5

          receiving a private or direct student loan.

           Technical and clarifying amendments  .  This bill's provisions are 
          intended to provide disclosure about various loan options for 
          prospective borrowers. Staff recommends the following technical 
          and clarifying amendments:

             a)   On page 2, lines 14-15, strike the current language and 
               instead insert: "Federal student loans are required by law 
               to provide a range of flexible repayment options, such as 
               income-based repayment and income-contingent repayment 
               plans, loan forgiveness benefits, and borrower protections 
               that private student loans are not required to provide."

             b)   On page 2 line 16, after "more" insert "or less"

             c)   On page 2 lines 30-33, clarify the variability of 
               private loans.

             d)   On page 2 between lines 33 and 34, insert, "(3) Students 
               should contact the lender of the private student loan or 
               their educational institution's financial aid office if 
               they have questions."

             e)   On page 3 lines 5-7, amend to read, "?disclose the 
                reason   basis  for each lender's inclusion on the list. The 
               institution shall also  inform   disclose in the list that  the 
               student  of his or her right   has the ability  to choose  other  
                any  lenders."

           Arguments in support  .  The California Student Aid Commission 
          writes that, "SB 1289 is consistent with our Commission's 
          program principal to provide information and guidance to 
          students and their families on alternative methods for financing 
          a college education. Last year student loan debt surpassed 
          credit card debt, and private student loans are an 
          ever-increasing proportion of that number."

          The American Federation of State, County, and Municipal 
          Employees (AFSCME) writes that, "students often are not aware 
          that some private loans don't have the same protections as 
          federal loans, have uncapped variable interest rates, and lack 
          flexible repayment options. SB 1289 is an important bill that 
          provides private student loan information upfront so that 
          students and their families can make fully informed decisions on 








                                                                  SB 1289
                                                                  Page  6

          the best way to fund their educations."  
           
           Arguments in opposition  .  The California Association of Private 
          Postsecondary Schools writes that, "under current law, including 
          the Truth in Lending Act (TILA) and the United States Department 
          of Education financial aid regulations (FSA), schools and 
          financial institutions are already required to provide extensive 
          disclosures to prospective borrowers. The existing disclosures 
          provide the same sort of disclosures mandated under SB 1289." 

           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          American Federation of State, County and Municipal Employees
          Associated Students of the University of California, Davis
          California Faculty Association
          California Student Aid Commission
          Consumer Federation of California
          Institute for College Access & Success
          Public Advocates, Inc.
          University of California Student Association
          Western Association for College Admission Counseling
           
            Opposition 
           
          California Association of Private Postsecondary Schools


           Analysis Prepared by  :    Kevin J. Powers / HIGHER ED. / (916) 
          319-3960