Illinois House Bill 2746, also known as the “Know Before You Owe Private Education Loan Act,” was enacted by Illinois Governor JB Pritzker on August 26, 2021, after passage in the unanimity by both houses of the Illinois Assembly. The law “aims to provide potential student borrowers with essential information, enabling them to make informed decisions about how to responsibly finance their education,” by ensuring that student borrowers are made aware of their eligibility for federal loans beforehand. to contract private loans. The law also imposes new certification and reporting requirements on private student lenders and educational institutions.

What happened

Illinois Governor JB Pritzker recently signed the bipartisan Know Before You Owe Private Education Loan Act. By law, private student lenders must obtain certification from educational institutions of certain information before disbursing private student loans or revenue sharing agreements, including the borrower’s registration status, cost of attending the facility and the difference between the cost of attendance and the borrower’s estimated financial assistance.

Educational institutions must provide the requested certification within 15 days of receipt or must notify the lender that the institution will need more time to comply or refuse to certify the loan. Before providing the certification, educational institutions should determine whether the student borrower has exhausted available federal financial aid and, if not, notify the borrower accordingly and provide information and disclosures regarding the eligibility of the borrower for financial aid. These disclosures include the amount of federal financial assistance for which the borrower is eligible; “The benefits of federal loans.” . . including disclosure of income-based repayment options, fixed interest rates, deferrals, flexible repayment options, loan cancellation programs, additional protections, and higher student loan limits for dependent borrowers whose parents are not eligible for a Federal Direct PLUS loan ”; the impact of a private loan on the borrower’s eligibility for federal financial assistance; and the borrower’s right to choose a private student lender of their choice and to refuse or cancel the private student loan.

If a lender disburses the loan before receiving the required certification, the lender must first notify the school in writing of the amount of credit granted to the student borrower and report the disbursement to the Student Loans Ombudsman.

The law further requires that private student lenders provide detailed loan statements to borrowers at least every three months while the borrower is in school, presumably so that borrowers can see how their private student loan obligations are increasing. while they are still enrolled in school. The law includes separate disclosure requirements for revenue sharing agreements (ISAs), which are defined as loans under the law. Information specific to the ISA requires the disclosure of an annual percentage rate that would apply to the ISA based on specified post-graduation earnings scenarios. By law, ISA providers are required to report the APR for each ISA assuming the borrower earns the annual equivalent of the minimum income above which payments are required, and for each income bracket $ 10,000 above that amount to the annual income at which the borrower would pay the maximum amount payable under the ISA (often referred to as the minimum income threshold) within the maximum number of monthly payments that may be required (often called payment term).

The law also imposes new reporting requirements on private student lenders and educational institutions. Private student lenders must submit to the Ministry of Financial and Professional Regulation and the Student Loans Ombudsman an annual report containing information on the schools in which the lender has disbursed funds, the volume of loans made each year at each school , the historical lifetime default rate for borrowers obtaining secured loans, and copies of exemplary documents provided to borrowers.

Educational institutions must annually certify to the Board of Higher Education and the Illinois Community College Board, where applicable, that they have complied with the certification requirements set out in law.

The law entered into force upon signature by the governor.

Why is this important

The law requires education providers to certify specific information that is generally not included in current private education loan certification processes. It broadly defines “private education lender” to include AIS providers.¹ and student finance companies and applies to any educational institution, including any online education program, that provides post-secondary education to a person located in Illinois. Therefore, private student lenders and educational institutions located outside of Illinois may be subject to legal requirements if the student borrower resides in Illinois.

Significantly, the law recognizes the growing popularity of ISAs by regulating them alongside traditional private student loans. However, it is concerning that the specific quarterly disclosure requirements of school borrowers require ISA providers to disclose multiple APRs for each ISA based on a calculated range of multiple post-graduation earnings, regardless of whether these income amounts are unlikely to occur. Depending on the minimum income thresholds for an ISA program, the range of APRs to be disclosed could all be based on income greater than what many of those students could reasonably expect to earn, which could lead students to reluctant to underinvest debt in their education. At the same time, the required APR disclosure methodology might underestimate the probable income and the probable APR that the student might have to pay. Finally, it is important to note that APR disclosures do not represent the highest or lowest possible APR that borrowers may be required to pay under an ISA and that the APR disclosed for certain income scenarios may. be a negative number, which may confuse students even more. .

It is hoped that regulations and disclosure models will be adopted quickly to allow ISA providers to avoid potential confusion for consumers.

Manatt has a leading practice advising student loan providers, education providers, and revenue sharing agreement providers, and currently advises clients on these matters. For more information, contact the authors or any member of the Manatt Financial Services team.

_{¹ See, in general, Ritter, Dubravka and Webber, Douglas A., Modern Income Sharing Agreements in Post-Secondary Education: Features, Theory, Applications (2019-12-06). FRB of Philadelphia Payment Cards Center Discussion Paper No. 19-6, available at SSRN: https://ssrn.com/abstract=3499957 and at http://dx.doi.org/https://doi.org/10.21799 /frbp.dp.2019.06.}