House Committee on Education and Labor
U.S. House of Representatives

WASHINGTON, D.C. – Rep. Howard P. “Buck” McKeon (R-CA), the U.S. House Education and Labor Committee’s Senior Republican Member, today will introduce the Financial Aid Accountability & Transparency Act, comprehensive reform legislation to improve disclosure for students and establish safeguards to prevent conflicts of interest in the student loan industry.  McKeon’s financial aid reform bill follows legislation he introduced earlier this year to provide parents and students better disclosure about the costs of college.

“Our nation’s financial aid system exists for a single purpose: to serve students,” said McKeon.  “Congress has an obligation to make sure that in our move to reform this system, we never take our eyes off the students who depend on us to protect their interests.  By instituting better disclosure practices, more accountability, and clear codes of conduct within this industry, we will be well on our way to restoring students’ trust in this vital program.”

McKeon’s legislation strengthens student loan reform measures introduced by Members of Congress earlier this year and returns the focus of the reform process to serving the needs and interests of students.  The Financial Aid Accountability & Transparency Act would address this in four ways:

• Establishing financial aid codes of conduct;
• Reforming “preferred lender lists”;
• Strengthening disclosure for students; and
• Preventing conflicts of interest between lenders and financial aid officers.

“As Congress moves toward reauthorizing the Higher Education Act, these reforms must be key components of our efforts,” McKeon concluded.  “By arming students with more and clearer information about their financial aid rights and by instituting safeguards to prevent costly conflicts of interest within the system, we will help to keep the federal student aid program on a firm foundation for generations to come.”

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Following is a summary of the Financial Aid Accountability & Transparency Act:

Establishing Financial Aid Codes of Conduct:

Under the Financial Aid Accountability & Transparency Act, colleges and universities must develop a Code of Conduct for employees that work with the federal and private student loan programs.  The Code must:

• Include a limitation on gifts, payments, or other financial benefits, including the opportunity to purchase stock, which present or give the appearance of a conflict of interest; and
• Prohibit financial aid employees from receiving any fees, payments, or financial benefits as compensation for consulting services or serving on advisory councils.  Under the Code, employees may be permitted to be reimbursed for travel, food, and two days/one night of lodging expenses related to professional development and other student services training.

Reforming “Preferred Lender Lists”

Under the Financial Aid Accountability & Transparency Act, if an institution recommends lenders for either private or federal student loans (preferred lender lists), then it must adopt a formal written policy about how it selects these lenders and make this policy clear to students, lenders, and taxpayers.  Each institution’s preferred lender list must include at least three non-affiliated lenders.  Moreover, the institution must make clear to students that they are free to borrow from any lender, not just those on the preferred lender list.

Strengthening Disclosure for Students

Under the Financial Aid Accountability & Transparency Act, in order to ensure that students are receiving the most relevant and straightforward information about the loan product offered by each lender, institutions must adopt a policy that discloses, at a minimum, the following information:

• For federal and private loans, an institution must:

        - Disclose to students why they have chosen the lenders on their Federal Family Education Loans (FFEL) or private loan preferred lender list, if they have one.  Similarly, schools participating in the federal Direct Loan program also must inform students why they have chosen to participate in it;

        - Clearly affirm that students in the FFEL program are free to borrower from any lender, not just the ones on the institution’s preferred lender list;

        - State the maximum amount of federal grant and loan aid available; and

        - Disclose the institution’s full and complete cost of attendance.

• For federal loans, the institution must disclose the:

        - Interest rate of the loan;

        - Fees associated with the loan;

        - Repayment terms available for the loan;

        - Opportunity for deferment or forbearance; and

        - Contact information for the lender.

• For private loans, the institution must disclose the:

        - Method of determining the interest rate of the loan;

        - Types of repayment plans;

        - Early repayment options;

        - Other borrower benefits; and

        - Late payment penalties.

The reform bill also requires private loan lenders to clearly inform potential borrowers of their rights prior to applying for a private loan.  The Financial Aid Accountability & Transparency Act requires the lender to give the student a notice – to be signed by the student prior to signing the contract for a private education loan – that includes the following information:

• The student may qualify for federal financial assistance that may make a private loan unnecessary;
• The federal student loan programs provide better terms and conditions including a lower interest rate and fewer fees; and
• The consumer can obtain additional information about the federal programs from the Department of Education’s website.

Preventing Conflicts of Interest Between Lenders and Financial Aid Officers

The Financial Aid Accountability & Transparency Act puts in place new restrictions to prevent conflicts of interest between student loan lenders and college and university financial aid officers.  While the bill allows an institution to negotiate lower interest rates or fees on loan products for students and parents, it explicitly bans:

• Revenue sharing agreements through which a lender or guaranty agency pays an institution a certain percentage based on its loan volume; and
• Arrangements – such as “call centers” – in which lenders offer staffing assistance to an institution’s financial aid office, unless the assistance provides informational materials for the purposes of educational counseling, financial literacy, or debt management.  If the institution accepts these types of educational materials, those who developed the materials must be disclosed.