Student Loan Sunshine Act Preparation
THE RECENT SCRUTINY OF relationships between colleges and student loan companies has sparked an explosion of guidance to eliminate any appearance of conflicts of interest in the student loan program.
Legislation passed by Congress and signed into law, however, will trump any other guidance. The House of Representatives has taken the lead by passing the Student Loan Sunshine Act (H.R. 890), a bill that still has to be approved by the Senate and signed by President Bush, making it impossible to know exactly what the final law (if any) will include. Nevertheless, the House bill offers a good indication of the practices financial aid offices-and other agents of the college, including alumni associations, booster clubs, or other organizations directly or indirectly associated with the institution- will have to adopt. What preparations should they make for this or similar legislation that Congress is expected to pass this year? Read on.
Each institution would be required to develop and display on its website a code of conduct with these provisions:
- Lenders and affiliates would be prohibited from giving any financial benefits (including the chance to purchase stock) to employees with any financial aid responsibility as compensation for consulting services, advisory council service, or otherwise advising lenders.
- Institutions would be prohibited from recommending a lender in exchange for the lender providing material benefits to the institution or its employees.
- Lenders, guarantors, or servicers would be prohibited from offering gifts to institutional employees-including any gratuity, favor, discount, entertainment, hospitality, loan, or other item valued at more than a nominal amount. Examples are gifts of services, transportation, lodging, or meals. The term "gift" would not apply to informational material related to loans or financial literacy (e.g., a brochure). Similarly, food, refreshments, training, or informational material that is an integral part of a training session designed to improve the lender's service or contribute to professional development of the institution's employees would be allowed. Counseling provided to borrowers for exit counseling would also be allowed, provided that an institution's staff controls the counseling and that the counseling doesn't favor a single lender.
- Lenders could not give gifts to employees' family and friends if such gifts were given with the employee's knowledge and consent and if the employee had reason to think the gift was because of his or her position.
- Lenders could not provide staff for call centers or financial aid offices, unless this were related to professional development training, or providing educational counseling materials, financial literacy materials, or debt management materials to borrowers. (These materials must disclose who provided them.)
- Institutions would be prohibited from requesting, accepting, or considering any private loan funds from a lender in exchange for the institution providing concessions or promises to the lender.
- Financial aid staff would be prohibited from participating in lender advisory councils. Lenders could seek advice from employees to improve products and services for borrowers, as long as no compensation (including for transportation, lodging, etc.) was provided.
- All employees with student aid responsibilities would have to be trained annually on code of conduct compliance. The Department of Education's inspector general would investigate reported violations and annually submit a report to the Senate and House education committees that identified reported violations of the gift ban, including the lenders involved in each violation.
The bill would require the secretary of education to prepare a report on the adequacy of information provided to students and parents about education loans. The secretary would then consult with students, college representatives, lenders, loan servicers, and guaranty agencies to develop a model disclosure form for informing students about loans from lenders appearing on their preferred lender lists.
The Department of Education would be required to make the report and model disclosure form available to institutions, lenders, and the public and annually assess the form to make improvements.
At a minimum, the model disclosure form would provide the loan's interest rate; any fees; repayment terms; opportunity for deferment or forbearance while in repayment, including in-school deferment options; and additional terms and conditions, including benefits contingent on repayment behavior. In addition, the form would provide annual percentage rates for loans, determined on the basis of the actual net disbursed amount of the loan, the average amount and interest rate of loans borrowed by students enrolled in the institution during the preceding academic year, contact information for the lender, and any philanthropic contributions the lender made to the institution.
For private loans made by preferred lenders, institutions would have to disclose how to determine the loan's interest rate, if and how early repayment may be available without penalty, late payment penalties, and any other information that the secretary may require.
Preferred lenders would be required to provide annually to institutions the information required in the model disclosure form for each type of loan provided to students attending the institution for the preceding academic year.
An institution would be required to post all information from the model disclosure form on its website and in any student aid material it distributed.
Institutions using a preferred lender list would be required to submit an annual report to the secretary with information from the model disclosure form for each type of loan provided by each preferred lender to its students.
The report would also include a detailed explanation of why institutional officials believe the terms and conditions of each type of educational loan provided are beneficial for its students. Institutions would have to make the report publicly available and provide it to all students attending or planning to attend the school before they've made a loan selection.
Preferred lender lists would have to explain why each lender has been included, especially with respect to terms and conditions favorable to the borrower. The list would also make it clear that students do not have to borrow from a lender on the list.
Preferred lender lists would need to include at least three lenders that are not affiliated with each other. They would also need to indicate if a lender were affiliated with any other lender on the list and to describe the specifics of any affiliations. The secretary would maintain a list of lender affiliates of all eligible lenders and provide this list to institutions to help them comply.
Institutions would also be required to establish a process to ensure that preferred lenders are selected based on the benefits provided to borrowers, including (1) highly competitive interest rates, terms, or conditions, (2) high-quality servicing, or (3) additional benefits beyond the standard terms and conditions. Aid administrators would be required to exercise a "duty of care and a duty of loyalty to select preferred lenders without prejudice and for the sole benefit of the student."
The bill would forbid institutions from denying or impeding the borrower's choice of a lender, or causing unnecessary delays in loan certification for borrowers who choose a lender that has not been recommended or suggested by the institution. It would require an institution to state on its website and in any student aid materials distributed that students aren't required to use preferred lenders and that the institution is required to process loans from any eligible lender selected.
The bill would also require an institution to include an easy-to-understand explanation of maximum federal grant and loan amounts and the institution's cost of attendance on its website and in its financial aid materials.
Finally, the bill would prohibit preferred lenders from providing a private loan to a student until the institution informed the student of any remaining options for federal loans and any terms and conditions of available federal loans that were more favorable to the borrower.
In addition, lenders would be prohibited from using an institution's name, emblem, mascot, logo, or any words, pictures, or symbols readily identified with the institution in any way that implied that the institution endorsed the private educational loans offered by the lender. This restriction would apply to lenders' marketing efforts for private loans.
Institutions and lenders would be required to comply with the Sunshine Act as a condition of receiving federal funds or assistance.
If the secretary determines that an institution or lender has violated a subsection, the penalty would depend on the severity of the infraction. Institutions or lenders that don't participate in Title IV loan programs may be fined up to $25,000. For lenders that participate in the Title IV programs, the secretary may limit, terminate, or suspend the lender's participation in the program.
Haley Chitty is assistant director of communications at NASFAA, www.nasfaa.org.