New Federal Regulations Could Help Families Decide About College Debt

A few weeks ago, the Student Loan Ranger outlined some recently published regulations that were created to address the spate of large institutions suddenly closing.

The point of these new regulations was twofold: to ensure that defrauded borrowers can access relief and to create a kind of early warning system so that families and the federal government would know sooner whether a school might be having financial or other issues. We've previously focused on borrower relief; now let's discuss the other half of these new rules.

[Learn how defrauded student loan borrowers will receive relief with new regulations.]

The early warning system stands to help families decide not only which college to choose but also how much might be too much to borrow to attend. It also intends to ensure that if there is a problem at the institution, the school will be able to reimburse the federal taxpayers for any federal student loans that are discharged as a result of the school's failings.

The rules do this by requiring schools to issue letters of credit -- or insurance -- or other financial protections payable to the Department of Education when certain events occur. These financial protections ensure that regardless of the institution's financial strength, the federal government has a good chance of being reimbursed if a large amount of eligible claims for discharge are received from the school's students or if the school closes entirely.

Anytime these financial protections are required, the school will also be required to disclose that fact in all its advertisements, websites and likely via direct delivery to all of its current and potential students. Some of the events that could require a school to issue these disclosures include:

· A high percentage of students defaulting on their federal student loans.

· The school being sued by a state or federal agency and other types of pending litigation.

· The school's accrediting agency sending certain warnings or actions.

· The Securities and Exchange Commi ssion or an audit opinion putting the future of the school in doubt -- in the case of a publicly traded school.

In addition to these triggers, for-profit schools, which have come under extra scrutiny because of the recent closings of giants Corinthian College and ITT Tech, will also be required to disclose if more than half of their recent alumni appear to have not been able to reduce the balance of their loans over the last several years. This disclosure alone could be invaluable to potential students or even currently enrolled students in determining college and debt level choices.

[Read more about student loan information for ITT Tech students.]

If you see such a notice, check out the average debt level of a school's students at sites such as the Department of Education's College Navigator and aim to stay below that level. A lso check the average starting salary in the field you are pursuing and bump it up against the average debt of attending your school of choice.

Is that level of debt affordable at that starting salary? If the answer is no, it may be time to find an alternative , such as enrolling part time and working to keep borrowing to a minimum.

The other reason to pay attention to these disclosures is to see if it might be an indication that the school is at risk of closing. A closed school in no way means a bad school -- sometimes schools just decide they've had a good run and it's time to close .

But sometimes, as we saw with Corinthian, a school closes because of financial problems or issues with its educational programs. The problem arises when schools close and no other school is willing to accept that school's credits, often leaving students with debt and nothing to show for it.

[Learn what to know about college closings and financial aid.]

Some advocates of these rules fear the new administration will repeal them, especially those that appear to target the for-profit school industry. Even we of the Student Loan Ranger disagree about the chances of that happening.

While it's too early to determine the next Congress' and new administration's priorities, the Student Loan Ranger thinks that changes to higher education won't be one of them. At the very least, these rules could be around at least long enough to be implemented and show their benefits before be coming a potential target .

But we hope that doesn't happen -- these new disclosure and financial protection tools increase the transparency consumers need to make good choices in higher education while protecting student loan borrowers and federal taxpayers from fraudulent schools.

Betsy Mayotte, director of consumer outreach and compliance for American Student Assistance, regularly advises consumers on planning and paying for college. Mayotte, who received a B.S. in business communications from Bentley College, responds to public inquiries via the advice resource "Just Ask" and is frequently quoted in traditional and social media on the topics of student loans and financial aid.