President Barack Obama's administration has asked colleges to begin using a new standard financial aid offer letter next school year to help families compare how much each institution actually costs.
The Financial Aid Shopping Sheet, if voluntarily adopted by the colleges, would require colleges in the 2013-14 school year to outline the total estimate of tuition, fee and other costs, the institution's rates of completion and default, and a student's potential monthly loan payment due after graduation.
About 10 universities have already agreed to provide this information to incoming students, according to Education Secretary Arne Duncan. “Families choosing a college should have clear and comparable information in a common format to guide their choice,” he wrote in a letter to college presidents Tuesday.
The finalized sheet, released by the White House today after a draft was posted in April, is an attempt to help educate students and their parents about the differences between grants and loans. It is also intended to provide specific information about the overall debt burden a graduate will face – and how the tab would differ among schools.
The Consumer Financial Protection Bureau estimates outstanding student loan debt for U.S. households at about $1 trillion, an amount greater than what is owed on credit cards or cars. Using data from lenders and other sources, a report from the agency last week estimated that students now owe $864 billion in federal loans and about $150 billion to private lenders.
Financial advisers always recommend clients accept all offers of federal loans before considering private student loans. Federal loans are advantageous because the government pays the interest while the student is still in school, borrowers can receive income-based repayment options and loans are canceled in the case of death.
Default rates of private student loans spiked following the 2008 financial crisis and students still are in default on more than $8.1 billion, representing 850,000 distinct loans, according to the report.
A Senate Banking subcommittee held a hearing on Tuesday at which the report's assertion that private student loans often lack repayment flexibility was discussed. The administration argues that private student loan debt should be easier to dispel in bankruptcy.
Many student loan borrowers who are making monthly payments can't get their private lenders to agree to better loan repayment terms even though interest rates are historically low, Rohit Chopra, student loan ombudsman for the CFPB, said in written testimony.
“Policymakers have paid significant attention to the refinancing and modification conditions in the mortgage market,” Mr. Chopra said. “But given the potential impact of student debt on the broader economy, the situation is rapidly demonstrating the need for attention to determine whether action is needed.”
Jack Remondi, president of private student loan provider Sallie Mae, said the lender backs reasonable reform to bankruptcy laws. “Sallie Mae supports bankruptcy reform that would require a period of good-faith payments, that is prospective so as not to rewrite existing contracts, and that applies to federal and non-federal education loans alike,” he said.
Mr. Remondi noted that Sallie Mae in 2009 became the first national lender to recommend that students make payments to student loans while they are still attending school and reward students who agree to do so by granting them lower interest rates. He told the panel that Sallie Mae's in-school customers who opt for an interest payment plan or the fixed $25-per-month plan can save about 30% to 50% in total interest costs.
But Deanne Loonin, director of the National Consumer Law Center's Student Loan Borrower Assistance Project, said that private-sector student lenders should have to offer loan modifications to distressed borrowers and that the debt should be discharged in case of death or disability. She said some private lenders are willing to rework loans, but typically the new arrangement is short-term and doesn't help borrowers all that much.
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