Understanding Durbin's Know Before You Owe Student Loan Act

nerdwallet THE KNOW BEFORE YOU OWE PRIVATE STUDENT LOAN ACT The Know Before You Owe Act of 2012 amends both the Higher Education Act and the Truth in Lending Act to strengthen requirements surrounding private student loans. Private lenders would have to obtain information before issuing a loan, including certification from the school that students have been fully informed of their financing options. This certification process has been found to reduce the amount borrowed 30% of the time and decrease the default rate. With requirements for both private lenders and schools, the bill aims to increase financial literacy among students and improve responsible lending practices. COPYRIGHT NERDWALLET ALL RIGHTS RESERVED 2012 STUDENT LOANS: BY THE NUMBERS Why is it important to support Know Before You Owe? Of student loan borrowers do not 60% understand the difference between private and federal loans 27% Borrowers had Federal 52% student loans but borrowed less then they could have Of private loan borrowers in 2007-2008 borrowed less than they could have in federal loans. 25% FEDERAL LOAN Borrowers took out no federal loans at all LIMITS UNDERGRADUATE DEPENDENT STUDENT $2,000 $2,000 $2,000 DIRECT $2,000 $5,500 $5,500 UNSUBSIDIZED $4,500 $3,500 DIRECT SUBSIDIZED $5,500 $5,500 $5,500 $5,500 PERKINS FRESHMAN SOPHOMORE JUNIOR SENIOR What are the characteristics of federal and private loans? elb FEDERAL VS. PRIVATE FEDERAL STUDENT LOANS PRIVATE STUDENT LOANS Fixed interest rate. Federal student loan interest rates are on Both fixed and variable interest rates. Variable interest rates can substantially increase the total amount you repay. average lower then private student loans. Deferment Students can defer payments under certain conditions (such as returning to school for additional degrees) Typically not offered. Forbearance Students can postpone payments due to financial hardship or illness. Typically not offered. Income-Based Repayment (IBR) Caps monthly loan payment at 15% of income for students with financial hardship. Typically not offered. Public Service Loan Forgiveness Remaining loan debt can be forgiven after 10 years as a public service employee. Typically not offered. Interest could be tax deductible Interest could be tax deductible Loans can be consolidated into a Federal Consolidation Loan, preserving •.... special federal repayment programs. Loans cannot be consolidated federally, but can be consolidated in the private sector. Not able to discharge in bankruptcy. Not able to discharge in bankruptcy. NOTE: Senator Durbin has also introduced the Fairness for Struggling Students Act, which would restore the availability to discharge private student loans in bankruptcy. OVERVIEW OF KNOW BEFORE YOU OWE "A little bit of education will go a long way towards helping young people save some money while still earning a valuable degree." -Senator Durbin Introduced in March, 2012 by Senators Dick Durbin (D-IL) and Tom Harkin (D-IA) The bill structures requirements for both private lenders and institutions of higher education to improve the financial literacy of students and support responsible lending practices. REQUIREMENTS FOR PRIVATE LENDERS: REQUIREMENTS FOR COLLEGES: M Inform students about their federal financial aid options and eligibility Certify with the borrower's school the following information: M Enrollment status and cost of attendance Council students about the terms and conditions of federal and private student loans M Eligibility to borrow Provide quarterly updates to borrower on existing loans: M Advise students on their ability to serect a private lender of their choice and rights to accept, reject, or cancel a private loan under current law, Balance M Interest Rate M Accrued but unpaid and capitalized interest M Respond to certification request within 15 business-days Report information to the cfpb about their student loans NEXT STEPS: Senators Durbin and Harkin are currently working to bring this bill to a vote in Congress. NerdWallet's Student Loan Calculator can help you identify your federal loan limits, estimate your loan payments, and consider your repayment options. Nerdlallet's Student Loan Calculator www.nerdwallet.com/education/studentloancalculator OFF ON/C M- SOURCE http://www.federalreserve.gov/SECRS/2009/May/20090529/R-1353/R-1353_052609_21079_591049709890_1.pdf http://www.consumerfinance.gov/blog/too-big-to-fail-student-debt-hits-a-trillion/ http://libertystreeteconomics.newyorkfed.org/2012/03/grading-student-loans.html http://www.nera.com/nera-files/PUB_Student_Loans_0312.pdf http://projectonstudentdebt.org/files/pub/private_loan_facts_trends.pdt http://studentaid.ed.gov/types/loans/subsidized-unsubsidized http://studentaid.ed.gov/types/loans/federal-vs-private http://durbin.senate.gov/public/inder.cfm/pressreleases ?ID=4acac041-2d8a-4aa7-ab66-d9fe08554a88 00 %24