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Private student loan laws: Compliance and consequences

May 25, 2018

For institutions of higher education that offer private student loans, there are a multitude of federal and state laws that need to be followed. Keeping up with these laws can be a significant challenge, particularly where institutions operate campuses in multiple jurisdictions, or offer a variety of student financing options (e.g., loans, payment plans, retail installment contracts). Staying abreast of these requirements is critical, however, as the ramifications for noncompliance can be severe. 

Truth in Lending Act (TILA)

Originally enacted in 1968 by the Federal Reserve Board, TILA is a federal consumer protection law designed to ensure that individuals understand any financial agreements they enter into with businesses. It also ensures that lenders disclose important information about the loans—like rates, fees, and other terms and conditions that may apply—and forbids lenders from pushing consumers into loans or other financial products that would be the most beneficial to the lender.

In 2008, the Higher Education Opportunity Act amended TILA to make clear that all entities providing private education loans, including higher education institutions, must comply with TILA’s federal disclosure regulations, as well as new disclosures designed specifically for private education loans. Thereafter, the Federal Reserve Board revised Regulation Z to reflect and expand upon the statutory changes made to TILA.

State laws regarding disclosures

 In addition to the federal requirements contained in TILA and Regulation Z, each state has its own laws that lenders need to follow. As with federal law, these laws often apply to educational institutions extending credit. An institution covered by such state laws, in addition to complying with federal requirements, may need to make further disclosures, use different headings, alter locations of signature lines, obtain lender signatures, or even follow minimum font size guidelines. For example, Texas requires a specific paragraph regarding dispute resolution, and many states require that the lender be registered as a creditor in the state.

Compliance is critical

Though it may require a meaningful investment of resources, ensuring compliance with applicable federal and state laws is worthwhile. The penalties that may be imposed by federal and state governments for noncompliance with laws impacting private education loans are significant. Depending on the severity of the offense, institutions could find themselves facing fines, the voiding of the loans, or even criminal prosecution. For example, the state of Illinois classifies offenses as misdemeanors, reserving the right to punish any person who willfully violates its state disclosure laws with fines up to $1,000 and/or up to six months in jail. If the actions also violate federal law, there may be additional penalties sought by the federal government.