WASHINGTON – Sen. Chuck Grassley of Iowa today introduced legislation to increase the amount of information students receive about federal student loans, including their potential ability to repay, before rather than after signing onto tens of thousands of dollars in debt to Uncle Sam.

“The federal government is good at giving out student loans but poor at making sure students know what kind of debt they’re incurring and what will happen if they can’t repay,” Grassley said.  “There are lots of proposals to address the problem of unaffordable student loan debt after students have graduated, but that’s closing the barn door after the horse has gotten out.  This bill would help encourage students to borrow only what they can afford in the first place.”

Grassley’s Know Before You Owe Federal Student Loan Act strengthens the current loan counseling requirements for institutions of higher education in the Higher Education Act by making the counseling an annual requirement before new loans are disbursed rather than just for first-time borrowers.

The bill then adds several key components to the information institutions of higher education are required to share with students as part of loan counseling, including:

•    An estimate of the student’s projected loan debt-to-income ratio upon graduation based on the starting wages for that student’s program of study and the estimated total student loan debt the student will likely take out to complete the program.
•    A statement that the student should borrow the minimum amount necessary to cover expenses and that the student does not have to accept the full amount of loans offered.
•    Information about the default risk of having a projected loan debt-to-income ratio greater than 12 percent.
•    Options for reducing borrowing through scholarships, reduced expenses, work-study, or other work opportunities.
•    An explanation of the importance of graduating on time to avoid additional borrowing and information on the impact of adding an additional year of study to total indebtedness.

The bill also requires that a student manually enter, either in writing or through electronic means, the exact dollar amount of federal direct loan funding that the student desires to borrow.  This ensures that students make a conscious decision about how much they borrow rather than simply accepting the total amount of loans for which they are eligible, Grassley said.  

Grassley said that in fiscal year 2014, the U.S. Department of Education will make about $112 billion in Federal Direct Loans to students, making it one of the largest lenders in the United States.  When students fill out their application for federal student aid, their eligibility for federal student loans is calculated automatically.  Students may be eligible to take out thousands of dollars in federal student loans each year even if the federal need analysis determines they have no financial need.  Federal student loans are given out without a credit check or any analysis of the student’s ability to repay the loan in the future.  Institutions of higher education are required to offer the full amount of federal student loans for which the student is eligible even if a financial aid counselor knows a student is borrowing more than the student needs and likely will have trouble repaying.  

Total student loan debt in the United States is now second only to mortgage debt and the vast majority of this is from federal student loans, Grassley said.  Given the state of the economy, many recent graduates are finding this debt difficult to repay and the consequences of defaulting on federal student loans can be severe, including offsetting tax refunds or Social Security payments and garnishing wages.  “As the lender making loans on loose terms, the government has a responsibility at least to ensure that students know what they’re getting themselves into before they get in over their heads.  This bill would make for more informed borrowers and fewer rude awakenings after graduation,” Grassley said.   

Grassley said several Iowa programs for students inspired his legislation:  Grand View University in Des Moines’ “Financial Empowerment Plan;” the non-profit Iowa Student Loan’s “Student Loan Game Plan;” and the University of Northern Iowa’s “Live Like a Student” initiative.

Grassley also is the lead Republican co-sponsor of the Net Price Calculator Improvement Act of 2014 to improve the effectiveness of and access to net price calculators, which provide students with early, individualized estimates of higher education costs and financial aid figures before they decide where to apply.

For years, Grassley has worked on the bipartisan Understanding the True Cost of College Act that would create a universal financial aid form to help students better compare colleges’ financial aid offers and costs.

Grassley worked through the Finance Committee, with jurisdiction over tax policy, to help hold colleges accountable for their significant tax exemptions by pressing well-funded colleges to spend more of their endowments on student aid. He also has encouraged colleges to cut perks and salaries in the administrative suite, such as loans for vacation homes to executives and faculty at New York University.  Grassley also led the fight to remove the 60-payment limit on the student loan interest deduction. Congress eliminated the 60-day payment limit in 2001. The expanded policy since became permanent law.
 

 

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