Durbin, Enyart to Students and Parents: Beware Dramatic Differences Between Student Loan Options

Senator's Know Before You Owe Act Ensures Students and Families Understand All Financial Aid Options Before Borrowing

[GRANITE CITY, IL.] - College-bound high school seniors who must decide today which school they will attend in the fall should take care to exhaust every federal financial aid option available to them before turning to private student loans, U.S. Senator Dick Durbin (D-IL) said today while meeting with students and their parents at Granite City High School.  Noting that two-thirds of student loan borrowers were not aware of the difference between federal students loans and risky, higher-interest private students loans and that a majority of undergraduate students who take out private student loans do so even though they are eligible for safer, cheaper federal loans, the Congressmen called for passage of Durbin’s Know Before You Owe Act of 2013.  Enyart announced his intention to sign on as a co-sponsor of the House of Representatives’ version of the legislation.


“A higher education is part of the American Dream,” Durbin said during the meeting.  “Graduating with a massive debt burden is not.  Student debt is a looming crisis in this country, but many students and their parents still take out private loans even though they are eligible for safer, cheaper federal options.  We need to ensure that every student understands all the options available to finance their education before they sign on that dotted line.  This legislation, the first I introduced in this session of Congress, will do just that.”


"College is a ladder toward the American dream, but it shouldn't come with a mountain of unnecessary debt," Enyart said. "I'm proud to support this common-sense legislation that will ensure that college-bound students are getting the best deal on their loans."


Enyart said the legislation is especially important for his Southern Illinois district, where a large percentage of students are first-generation higher education students.   "This ensures that college students and their parents are getting the best deal possible and taking advantage of important government programs geared toward their benefit.”


Earlier this year, Durbin joined U.S. Senators Tom Harkin (D-IA) and Al Franken (D-MN) in introducing the Know Before You Owe Act of 2013, which would require private student lenders to obtain a certification from a student’s school before issuing them a loan.  Such a requirement would not impose an undue burden on lenders – Discover Financial Services, based in Riverwoods, Ill., already voluntarily certifies all its student loans with a borrower’s school.  The bill would also require colleges to counsel students before the sign on to expensive, even unnecessary, private student loans and inform them if they have any untapped federal loan eligibility.  In some instances, student have not applied for federal aid before they apply for private student loans or have not exhausted their federal loan options. 


There are stark differences between private student loans and federal student loans. Federal student loans have fixed interest rates and offer an array of consumer protections and favorable terms, including deferment and forbearance in times of economic hardship, as well as manageable repayment options, such as the Income-Based Repayment and Public Service Loan Forgiveness programs. In contrast, private student loans, which resemble credit cards rather than financial aid, often have uncapped variable interest rates (which spiked as high as 18% in recent years), hefty origination fees, few, if any, consumer protections, and are ineligible for federal forgiveness, cancellation or repayment programs.


At the meeting, Durbin shared the story of George Jacobs, a graduate of the International Academy of Design and Technology, a for-profit college owned by Career Education Corporation, in Chicago.  George originally took out a $60,000 private loan to finance his education.  Due to variable interest rates sliding anywhere from 7 to 13.9 percent, George’s private student debt has ballooned to $107,000.  Half of every paycheck goes toward his loan payments, but due to the high interest rates only a small percentage of those payments is counted towards his principal.  George was the first in his family to attend college and trusted his college to advise him properly on financial matters.  He was subjected to high-pressure sales tactics concerning his private loans and feels the college took advantage of him.  George says he wish he had better understood the options available to him before borrowing.


George is available to discuss his experiences with members of the media.  A document with his contact information and additional background is attached.


“A little bit of education will go a long way towards helping young people save some money while still earning a valuable degree.  College is expensive enough without taking on unnecessary debt,” Durbin said.


Specifically, the Know Before You Owe Act of 2013 would require private lenders to:


  • Certify with the borrower’s school that the student is enrolled and the amount the student is eligible to borrow before issuing a private loan;
  • Provide the borrower with quarterly updates on their loans, including accrued but unpaid interest and capitalized interest; and
  • Report information to the Consumer Financial Protection Bureau about their student loans.

The bill would require institutions of higher education to:


  • Inform students about their federal financial aid availability and eligibility; their ability to select a private lender of their choice; the impact of a private loan on their eligibility for other forms of financial aid; and their right to accept, reject or cancel a private loan as allowed under current law; and
  • Inform students about the terms and conditions of federal and private student loans.

Durbin, Harkin and Franken also introduced legislation to help college graduates struggling with overwhelming private student loan debt.  The Fairness for Struggling Students Act – also cosponsored by U.S. Senators Sheldon Whitehouse (D-RI) and Jack Reed (D-IL) – aims to restore fairness in student lending by treating privately issued student loans in bankruptcy the same as other types of private debt.  Since 1978, government issued or guaranteed student loans have been treated as nondischargeable during bankruptcy in order to safeguard federal investments in higher education.  In 2005, the law was unjustifiably changed to give private student loans the same privileged bankruptcy treatment as government loans, even though private student loans have vastly different terms and fewer consumer protections.  The bill would restore the bankruptcy law, as it pertains to private student loans, to the language that was in place before 2005 so that privately issued student loans will once again be dischargeable in bankruptcy like nearly all other forms of private debt.

“The weight of this high-interest, inflexible debt prevents many college graduates from living a secure middle-class life, dragging down our economy in the process,” Durbin said.  “Allowing these loans to be discharged is good for these students and good for the American economy.”


Last year, the Consumer Financial Protection Bureau released a report on private student loans which included policy recommendations that closely mirrored Senator Durbin’s bills.  The CFPB recommended that private student loans be dischargeable in bankruptcy, that lenders be required to fully certify private student loans and that schools be required to determine if a student has exhausted his or her federal financial aid options.


Over the last decade, private student loans have been the fastest growing and most profitable part of the student loan industry.  According to the Consumer Financial Protection Bureau, outstanding student loan debt now exceeds $1 trillion – more than credit card debt.  According to the Federal Reserve Bank of New York, around 37 million Americans held student loan debt last year with an average balance of $23,300.  However, only 39 percent of those student loan borrowers were paying down their balances last year - 14 percent of student loan borrowers (5.4 million Americans) were delinquent on paying their loans, while the remaining 47 percent of borrowers were either in forbearance or were still in school and adding to their debt.