Law Caps Size of Student Loans to Keep Them from Overburdening Borrowers

Goal is to put a check on HESAA, which has come in for criticisms of its ‘predatory’ lending practices

A new law will limit the amount New Jersey college students can borrow from the state’s student loan program in an effort to prevent them from burdening themselves with debt and rein in the state authority that writes the loans.

The law, which requires borrowers to exhaust their federal student loan options before taking out an NJCLASS loan also caps the amount they can borrow from the New Jersey Higher Education Student Assistance Authority at $150,000. It is not meant to hamper students’ ability to pay for schooling. It is meant to put a check on HESAA, the Higher Education Student Assistance Authority, which has been under fire for the past year over questionable lending and collection practices that a number of borrowers said had forced them into bankruptcy.

“Furthering your education is necessary to advance a career; it should never be a burden to do so, and it should be encouraged without fear of debt,” said Assemblywoman Mila Jasey (D-Essex), a primary sponsor of the bill. “This is the first step toward helping families struggling to send their children to college without saddling them with cumbersome loan debt.”

‘Predatory’ practices

Lawmakers introduced the measure (S-2578) last fall, about a month after holding hearings on HESAA’s practices, which some senators termed “predatory” and “loan sharking.” Several New Jerseyans testified at the August hearing and described a number of problems. They contended that HESAA had misled borrowers about flexible repayment options; did not allow for refinancing or loan consolidation; considered loans in default even when borrowers made partial payments and sent them to collection where they faced additional fees; and refused to even volunteer information about the possible forgiveness of debt when students died.

The new law, signed Monday by Gov. Chris Christie, addresses another issue that came up during the hearing: Students and their families were being allowed to borrow up to $200,000 in total, an amount they wound up unable to repay at the terms specified. It reduces that total to $150,000 initially, with the maximum increasing each year based on an inflationary index that tracks higher-education costs.

“It has become the norm for families and students to take on an overwhelming amount of debt to pursue educational goals,” said Assemblywoman Shavonda Sumter (D-Passaic), another main sponsor of the measure. “We must increase transparency under NJCLASS Loan Programs, better educate families on loan repayment options and requirements, as well as help families understand how much they can realistically handle in student loans.”

Verifying financial information

The new law also requires HESAA to verify the financial information reported by a borrower or co-signer on an NJCLASS loan application, which some senators said the authority was not necessarily doing.

The other major provision of the new law, which took effect immediately, is designed to reduce the amount students can borrow in NJCLASS loans in two ways:

  • Mandating that HESAA deduct the maximum amount of federal direct subsidized loans available to the student when establishing the maximum annual loan amount for a student borrower. Federal subsidized loans have better terms for students with financial need; for instance, the U.S. Department of Education pays the interest on these loans while a student is still in school at least part time, during the first six months after leaving school, and during any deferment period.
  • Requiring the authority to deduct the maximum amount of federal direct unsubsidized loans available when establishing the maximum NJCLASS loan amount if the interest rate for the federal loan is lower than the state loan rate, thus encouraging borrowers to take the loan with the lower rate.
  • “College loan debt should not follow you throughout your adult life,” said Assemblyman Daniel Benson (D-Mercer), another primary sponsor of the measure. “Responsible reform and targeted measures to educate incoming college students on managing loan debt is necessary to helping students make informed choices. It’s time to end this cycle of loading students up with debt that too often takes a lifetime to pay back.”

    Total loans

    NJCLASS issued more than 10,000 loans totaling nearly $163 million in the 2016 fiscal year — an average of $15,863 per student borrower, according to HESAA’s most recent annual report. The authority’s last audit showed HESAA had almost $1.9 billion in outstanding loans, including a small amount from a discontinued federal family-loan program, held by New Jerseyans in college and out-of-state students taking classes at New Jersey schools as of June 30, 2016. While the program is administered by a state authority, the money lent comes from private bonds. Students can borrow an amount up to the total for tuition, room, board, fees, books, and other related costs, minus any other financial aid they receive.

    This is one of a number of bills lawmakers introduced seeking to rein in HESAA and college costs in general. Four others have been signed into law, while several others remain pending.

    On Monday, Christie conditionally vetoed a separate measure (S-2214) aimed at improving the transparency of college costs.

    Reacting to a report by the New Jersey State Comptroller’s office that found at least three state colleges were relying heavily on mandatory fees, the bill would require state colleges to develop policies and a system of internal controls over the development and management of mandatory student fees, justify fee adjustments, and detail how all fees are spent. It would also mandate that the state secretary of higher education create a “shopping sheet” similar to a voluntary report of college costs and aid created by the U.S. Department of Education. The state sheet, which New Jersey colleges would be required to give prospective students along with their financial aid offers, would include information about the cost and debt that the student could expect to incur, as well as the institution’s graduation rate, student retention rate, and student loan default rate.

    In his conditional veto message, Christie sought only to revise that section of the bill pertaining to the shopping sheet. He said he supports it, but wants to give state schools that have already adopted the federal disclosure the “flexibility” to choose which sheet to provide to students.

    “Requiring New Jersey schools to use a State-specific version of the shopping sheet may cause confusion for students looking to compare New Jersey institutes of higher education against schools outside the State,” Christie wrote. Letting colleges decide which sheet to use “will provide our colleges and universities the flexibility needed to provide valuable information to prospective students, while remaining competitive with institutions from other states.”

    Two of the bill’s main sponsors, Sen. Shirley Turner (D-Mercer) and Assemblywoman Pamela Lampitt (D-Camden), did not respond to requests about the conditional veto so it is unclear whether they will accept Christie’s recommended language change. It’s possible that they will, though, given the change is a relatively minor one and affects only one line of text in the four-page bill.