Wall Street Reform and Student Loans

WASHINGTON -- Like many pieces of major legislation, the financial reform measure on which Congressional negotiators reached final agreement late last week satisfies no one entirely. Some consumer advocates and others who had pushed the Obama administration to try to radically alter the way Wall Street and financial institutions operate complain that the bill falls short of the transformative changes they had sought, depending instead on tougher regulation; banks and other lenders, meanwhile, argue that the changes would let the government, and its new regulatory powers, intrude too far into their business.

The financial reform measure, which is expected to come to a final vote in Congress this week, has significant implications for the student loan industry, and the shape of the bill's impact on lending largely mirrors the pattern above. Advocates for students heralded the legislation as a major advance in oversight of non-federal, or private, student loans, to which families and students have increasingly turned in recent years to fill the gap between federal, state and institutional financial aid and the rapidly increasing full cost of attendance at many colleges.

The most significant change won by supporters of greater oversight for private loans was the decision by lawmakers to give the newly created Consumer Financial Protection Bureau authority over virtually all types of non-federal student loans, including those that for-profit colleges make to their own students. (Those colleges had pushed to have such loans excluded, arguing that the loans -- like all alternative student loans -- are already covered under the existing Truth in Lending Act, which Congress toughened in 2008.) The legislation would give the Consumer Financial Protection Bureau supervision over loans made by all non-banks, and by banks with more than $10 billion in assets.

"We congratulate House and Senate conferees for reaching agreement on historic financial reforms, including a much-needed Consumer Financial Protection Bureau with authority over risky private student loans and other financial products," Pauline Abernathy, vice president of the Institute for College Access and Success, said in a news release about the legislation. “Private student loans have been woefully under-regulated, leaving students and families vulnerable to unscrupulous lenders and deceptive practices."

Another change, which may have more symbolic importance than regulatory impact, would be the creation of a separate student loan ombudsman position within the new agency. Borrowers with private student loans have often found it difficult to get help with problems or concerns, given the disjointed nature of the alternative student loan industry and the government's regulation of it to date. The ombudsman would give such borrowers a "central place [for borrowers] to go," Abernathy said, "to someone who is looking at all the issues, and who can flag the issues [for the bureau's regulators and members of Congress], and draw attention to them."

The legislation stops short of one major change on which consumer advocates, financial aid officers and lenders had all agreed, which would have required a lender providing a private student loan to certify with the prospective borrower's college that the student is eligible for the loan. The provision, which was designed to give colleges the opportunity to counsel borrowers to make sure they are aware of their other options (notably the availability of lower-cost and lower-risk federally subsidized loans), was in the House-passed version of the legislation but did not win support from Senate negotiators.