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House Approves Enhanced Financial Counseling for Student Borrowers

By Shai Akabas

Monday, July 28, 2014

Last week, the House of Representatives passed H.R. 4984, the Empowering Students Through Enhanced Financial Counseling Act, with broad bipartisan support (on a 405-11 vote). The bill would expand the frequency and scope of required financial counseling provided to student borrowers. The Bipartisan Policy Center (BPC) applauds this development.

Currently, under the Higher Education Act, institutions of higher education are required to provide specified counseling to all student borrowers before they accept their first Federal Direct Loan (“entrance counseling”) and upon leaving the institution (“exit counseling”). Entrance counseling must provide information on the borrower’s obligations, the consequences of defaulting, how accepting a loan might affect eligibility for other financial assistance, and resources available to the borrower (such as information on who the borrower can contact for an explanation of the terms and conditions of the loan). Required topics for exit counseling include repayment options, forbearance and deferred payment, debt management strategies, tax benefits, and the implications of defaulting. Institutions are not required to provide counseling to Pell Grant recipients or parents borrowing on behalf of their children through the PLUS Loan program.

The House bill, if enacted, would require students to receive annual financial counseling (i.e., in each award year). In addition to general information and resources currently provided to students, counseling would more clearly aim to ensure that students make choices that enable them to finance their education most efficiently and minimize their debt burden.

Specifically, annual counseling sessions would have to include: notifications to borrowers that they need not accept the full value of federal loans available to them; that grants, scholarships, and work-study programs should be accepted before student loans; and that federal aid options should be exhausted before taking out private loans. Student borrowers would also receive more detailed information on their outstanding balances and projected monthly payments as well as the annual and aggregate limits on federal student borrowing. The bill would require students to receive counseling before formally accepting or rejecting their loan for a given award year.

Exit counseling would also be modified by the legislation. In addition to information already required, institutions would have to provide departing student borrowers with information on their outstanding balance and scheduled monthly payments, any applicable grace periods before repayment, options for paying previously accrued interest, the effects of different repayment plans on monthly payments, and contact information for the borrower’s loan servicer.

The House bill would also require annual counseling for parents taking out PLUS loans on behalf of their children as well as Pell Grant recipients. Counseling for parents would be very similar to that provided to student borrowers, and Pell Grant recipients would receive information on the specific expenses covered by the grants, eligibility, strategies for budgeting for educational expenses, circumstances under which the student might have to repay the grant, and more.

BPC is encouraged that leaders in Congress are working together to improve financial literacy among student borrowers. We are hopeful that lawmakers will continue to collaborate on solutions to address the growing burden of student debt, which can hinder individuals’ household formation and savings for retirement and may even hamper U.S. economic growth.

Alex Cave contributed to this post.

KEYWORDS: PELL GRANTS, HIGHER EDUCATION ACT, FEDERAL DIRECT LOANS