Interest rates on private loans are typically variable, like on a credit card, and over the life of the loan much higher than the fixed rates on federal student loans. Lower income students usually receive the worst rates and terms, and private loans do not have the important borrower protections and repayment options that come with federal loans. We recommend the changes below to reduce reliance on risky private loans and to enhance protections for borrowers who have such loans.

Require School Certification of Private Loans

More than half (53 percent) of undergraduates who borrow private loans borrowed less than the annual maximum allowed for safer federal student loans. Unfortunately, many students who borrow private loans – and the family members who co-sign them – do not understand the difference between federal and private loans until it is too late. Requiring private lenders to confirm a borrower’s eligibility with his or her school before disbursing the loan ensures the student is eligible for that loan. It also gives the school a chance to help the student make an informed borrowing decision.

Students, schools, and lenders, as well as the CFPB and the Department of Education, have all endorsed requiring “school certification” of private loans, including notifying the student of remaining federal aid eligibility before the loan is certified. We urge the Department and the CFPB to require such certification for all private loans, and we support legislation (S. 2184) introduced in 2019 that would require it.

Increase Community College Students’ Access to Federal Student Loans

Nearly one million community college students cannot get a federal loan if they need one, because their school does not participate in the federal loan program. While many community college students can avoid borrowing, those who need to borrow to stay and succeed in school should have access to the safest, most affordable option: federal student loans. Without access to federal loans, students may turn to risky and expensive private loans or credit cards, or they may drop out, work excessive hours, or take fewer classes – choices that reduce their odds of earning a degree or certificate.

Federal and state policies should encourage community colleges to participate in the federal loan program and better support them in helping students make informed borrowing decisions.

Require Private Lenders to Discharge Loans in the Event of Death or Severe Disability

Congress should require private student lenders to discharge the loans of a borrower who dies or becomes totally and permanently disabled. Unlike federal student loans, there is no federal law requiring such discharges; some private lenders voluntarily provide these discharges under certain circumstances while do not. This means that private student loan borrowers and their families are not protected in the event of death or severe disability, an inequity that takes on new urgency in a global pandemic.