BILL ANALYSIS �
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
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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
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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
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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
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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
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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