Ed Dept reminds colleges that ISAs are private loans, subject to disclosure requirements


Diving Brief:

  • The US Department of Education on Wednesday reminded colleges of their legal obligation inform students of the costs and terms of taking out private loans, including revenue sharing agreements.
  • In an online notice, the ministry pointed out a recent discovery by the Consumer Financial Protection Bureau that laws and regulations regarding private lending apply to ISAs, a controversial arrangement in which college graduates reimburse expenses such as tuition and fees through a portion of their earnings over a period given.
  • The Department of Education also said it intends to work with federal agencies to provide colleges later this year with more information on how to improve reporting related to agreements with preferred lenders. Under these agreements, colleges endorse or promote loan products from private lenders, often in exchange for incentives, such as payment for financial aid brochures and other materials.

Overview of the dive:

ISAs have been an oft-debated way for students to use money from outside the federal student loan program to help pay for the cost of a college education.

A contingent of higher education experts back such arrangements, saying they can ease the financial burden on students by offering income-based refunds. Often, graduates are exempt from monthly payments if they fall below a certain income level.

But the agreements have also been criticized. Critics accuse ISAs of failing to give students an idea of ​​the true cost of paying for college and can lead to additional debt.

Whether they should be considered loans has also been disputed, as financial debts are subject to strict financial consumer protections.

The CFPB’s announcement in September shed some light on this.

The agency’s acting director said at the time that ISA vendors were “trying to evade scrutiny” by claiming their products were not loans. In a consent order, he asked a Virginia-based nonprofit, Better Future Forward, to stop declaring its ISAs not loans, provide new loan information and change its contracts. ISA.

Better Future Forward did not suffer any financial penalties.

And last month, the CFPB said he would consider college operations that provide private loans directly to students.

Ministry officials indicated on Wednesday that they will monitor college actions on this front, suggesting a federal crackdown on institutions that offer and approve shoddy loan repayment agreements.

The department said that, like the CFPB, it considers private student loans from ISAs. According to agency rules, colleges must publicly document why they approve private student loans, Rich Williams, chief of staff at the Office of Post-Secondary Education, written in an Education Department blog post.

Institutions must also adhere to a federal code of conduct that prohibits revenue-sharing agreements with private lenders and eliminates other conflicts of interest, Williams wrote.

Williams added that students should exhaust loans issued by the federal government before turning to private loans, as the latter lack the strong consumer and repayment protections built into federal loans.

“For students who still need additional loans to pay for their college education, the Department is committed to making higher education more accessible and affordable by supporting best practices that protect borrowers, so students don’t get graduate with mountains of debt they can’t pay off,” Williams wrote.


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