On March 29, Sen. Dick Durbin (D-IL) introduced SB2280, the Know Before You Owe Private Student Loan Act of 2012. The bill is in response to what Durbin calls "the student debt bomb."
In 2010, 23.5 million students were enrolled in degree-granting institutions. Those students found college to be an expensive proposition. In the 2009-2010 school year, tuition, room, and board for public institutions averaged $12,704. The same costs for private institutions averaged $32,184.
In 2007-2008, the latest year for which statistics are available, 38.7 percent of all undergraduates undertook loans to attend college — 14.8 percent of which were private loans, the target of the bill.
The Know Before You Owe Private Student Loan Act of 2012 seeks to require schools to notify students and parents if they have federal loan resources available to them before steering them t0 expensive, private lenders.
The bill was issued introduced with six co-sponsors — Sens. Richard Blumenthal (D-CT), Sherrod Brown (D-OH), Al Franken (D-MN), Tom Harkin (D-IA), John D. Rockefeller IV (D-WV) and Bernard Sanders (D-VT).
Durbin's press release notes that federal student loans have fixed interest rates, better terms, more repayment options and offer deferment or forbearance when students run into financial difficulty. Private loans have uncapped variable interest rates, which have risen as high as 18 percent, and no options for cancellation, forgiveness or repayment.
According to Durbin, they more resemble credit cards than loans.
The Know Before You Owe Private Student Loan Act of 2012 would require institutions to inform parents and students of the availability of, and their eligiblilty for, federal student aid; their right to select the lender they prefer; the impact a private loan has on their eligibility for other student aid; their rights under current law to accept, reject or cancel a private loan; and requires schools to inform students of the differences in terms and conditions between federal and private loans.
The bill would also require private lenders to certify that the student is enrolled, and the amount the student is eligible to borrow; provide borrowers with quarterly statements detailing accrued but unpaid interest and the amount of interest that has been capitalized.
Private lenders would also have to report the student loan information to the Consumer Financial Protection Bureau.
Currently, private lenders issue loans to students but do not require repayment until the student has completed college or is no longer attending. After a brief respite, loan payments must begin. Since these loans are not subsidized by the federal government, unpaid interest is deferred while the student is in school, but is then capitalized — added to the principal — once repayment begins, thus increasing the loan amount upon repayment.
According to FinAid, an education financial planning website, in 2010 total student debt, including federal and private loans, exceeded credit card debt for the first time. By June 2010, federal student loan debt stood at $865 billion and private student loan debt added an additional $168 billion to that total.
When capitalized interest is included in the federal debt calculation, it increases the federal outstanding loan debt by $50 billion.
FinAid projected that by May 8, 2012, total student loan debt, including federal and private loans, would total over $1 trillion.
Under current law, student debt cannot be discharged in bankruptcy.
Student loans are figured in when calculating eligiblilty for a mortgage or car loan. With debt as high as this, many worry that the students may never realize the dream of owning a home until all of their debt is paid off, which for many takes a lifetime.