College Student Protection and Financial Education Act
The NFEC has drafted student loan legislation to encourage college-bound students to take a personal finance class prior to committing to student loan debt. The main goal of the College Student Protection and Financial Education Act is to give college-bound youth the capacity to make informed financial decisions before they take out student loans.
Although our long-term goal is to live in a world where all our youth receive a comprehensive financial education, the NFEC is focusing its efforts on this niche market because our surveys show this is a cause that the majority of people back and its ease of implementation. Once we accomplish this objective, we will continue to push forward and promote the financial education agenda.
The NFEC’s financial literacy act would mandate that students under the age of 18 must take a personal finance course prior to committing to federally-backed student loans. The Act specifies a method for establishing a standardized course and for approving vendors. It also requires the administration of a standardized comprehension test.
The student loan legislation is modeled after the Bankruptcy Reform Act of 2005, which requires debtors to complete a personal finance course prior to the discharge of any debt in bankruptcy. The key difference between the Bankruptcy Reform Act and the College Student Protection and Financial Education Act is that the latter is proactive. The goal of the Act is to help our youth acquire the skills they need to make qualified loan decisions before they get into financial trouble.
Federal student loans authorized under the Higher Education Act of 1965 (P.L. 89-329), as amended, are offered at a lower interest rate than students would otherwise be able to get for a private loan because they are backed by the full faith and credit of the U.S. government. Federally-backed loans are both subsidized, which are means tested; and unsubsidized, which are not.
According to a report by the Congressional Research Service, “The principal objective of the HEA
The federal government operates two major student loan programs:
(1) The Federal Family Education Loan program (FFEL) program, where loan capital is provided by private lenders and the federal government guarantees lenders against loss; and
(2) The Direct Loan (DL) program, where the federal government provides loans to students and their families using federal capital (i.e., funds from the U.S. Treasury).
This legislation is modeled on the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 11 USC §727(a)(11). A provision of the Bankruptcy Abuse Prevention and Consumer Protection Act has all individual debtors in either chapter 7 or chapter 13 complete an “instructional course concerning personal financial management.”
According to the Congressional Research Service, the mandated training is intended to provide debtors with guidance about how to manage their finances in order to avoid future financial difficulties.
The concept of mandatory financial education in the context of bankruptcy was first introduced in 1997 by the National Bankruptcy Review Commission. In a report, New York Law School Professor Karen Gross wrote, “A nationwide debtor education program should help all individual debtors and their families deal with financial failure both over the short and long-term.”
Specific Provisions of the Act
1. Operative language:
The primary operative language of the Act will read as follows: “No lender shall disburse the first installment of a federally-backed student loan unless the borrower has completed an instructional course concerning personal financial management.”
It will include a disclaimer, similar to the Bankruptcy Reform Act, to this effect: “This paragraph shall not apply to a person deemed unable to complete this requirement because of unavailability, disability, or other exigent circumstances.Method for approval of vendors:
A method will be established to approve qualified vendors, and of posting their availability. Qualifications will include some provisions from the Bankruptcy Reform Act, such as requirements that:
- Vendors demonstrate adequate experience and background in providing personal finance courses; and
- The majority of a vendor’s board of directors are independent and not employed by the agency.
2. Standardized course:
The Act will require that the personal finance curriculum for one standardized national course be developed and approved. Similarly, one test will be developed to comprehensively demonstrate that the student has understood the key points. The course will last no longer than twelve hours and will include:
- Explaining how interest will be charged
- Reviewing key payback terms
- Practical tools to minimize debt during college and manage payments after graduation
- Key money management lessons to make qualified student loan decisions.
3. Reasonable fee:
The Act will provide a requirement, similar to the Bankruptcy Reform Act, to this effect: “If a fee is charged for the personal finance course, it shall be a reasonable fee; all agencies shall provide services without regard to ability to pay, and shall provide the course without charge in cases of need.”
This Act is expected to have no fiscal effect, as there are no ($0) taxpayer dollars involved.
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Other Student Loan Legislation
S. 829: Financial Literacy for Students Act. Objective is to integrate financial literacy education into each public elementary and public secondary school within a State that is eligible to receive funds under title I.
H.R. 172: Supporting the goals and ideals of “Financial Literacy Month.” Objective is to support the goals and ideals of Financial Literacy Month; to raise public awareness about the importance of personal financial education in the United States and the consequences that may result from a lack of understanding about personal finances.
H.R. 891: Young Americans Financial Literacy Act. Objective is to establish a grant program within the Bureau of Consumer Financial Protection that funds the establishment of centers of excellence to support research, development and planning, implementation, and evaluation of effective financial literacy education programs for young people and families aged 8 through 24 years old, and for other purposes.
H.R. 1538: National Financial Literacy Act of 2013. Objective is to provide incentives to encourage financial institutions and small businesses to offer continuing financial education to customers, borrowers, and employees, and for other purposes.