WASHINGTON -(Dow Jones)- At a time when the U.S. Congress is seemingly otherwise deadlocked in a partisan logjam, lawmakers voted in both houses Thursday to approve a major piece of legislation creating strict disclosure rules for private lenders active in the student-loan market.

Heading into the August recess, the Senate has been paralyzed in getting any major pieces of legislation finalized all week long.

But lawmakers agreed to come together in passing the Higher Education Act, the centerpiece of the federal government's laws dealing with education policy.

The Senate adopted the measure by a vote of 83-8, with one Senator voting " present."

A vote earlier Thursday in the House was 380-49.

The legislation will now proceed to the White House for President George W. Bush's signature.

The Act is supposed to be renewed every five years, but the last rewrite of the laws came in 1998.

A deal was reached between both parties in the House and the Senate Tuesday night about the final wording of the bill.

The bill would compel firms that lend money to students privately to provide significantly more information about fees, terms of the loan and rates of interest.

Currently, companies in the student-loan market are only required to abide by the generic truth-in-lending regulations. The new requirements are the first ones targeted at student lenders.

Rep. George Miller, D-Calif., chairman of the Education and Labor Committee, said "For too long, students have had to navigate the often murky waters of college loans without adequate protections or information. For the first time, this legislation will provide borrowers with full and fair disclosures and other urgently needed consumer protections when taking out and repaying private student loans."

During the debate in the Senate, lawmakers of both parties paid tribute to Sen. Edward Kennedy, D-Ma., who, as chairman of the Senate education committee, had spearheaded the charge to renew the Act for several years.

Kennedy wasn't present at the debate as he is suffering from brain cancer and is recovering in Massachusetts from treatment.

"This is the first legislation that specifically deals with the consumer and borrower disclosures around private student loans," said Luke Swarthout, higher education advocate at U.S. PIRG.

Lenders would have to tell students they are potentially eligible for federal financial aid, a cheaper way to borrow money to pay for college costs.

Financial institutions that participate in the federal student lending programs have more robust disclosure requirements than do those that lend privately.

Under the bill, private lenders would have to ask for evidence of a students' enrollment, remaining financial aid available and details of their outstanding financial needs after aid.

A recent study by the Consumers' Union found that only 50% of students maximize federal aid before turning to higher-price private loans.

Lenders would be required to inform borrowers at three separate points in the borrowing process about what the charges, terms and interest rate of their loan is.

In addition, private lenders would be prohibited from charging students who wanted to pay off their loans early, and guarantee the terms of a quoted rate for up to 30 days.

Loans through federal programs have regulated rates of interest and less onerous terms than do those that are made by private lenders.

The private lending marketplace is growing in size, with several lenders in the federally backed programs having withdrawn in recent years, often in favor of providing more lucrative, less-regulated private lending.

Congress took steps to attempt to shore up the federally backed lending programs earlier in the year, through a law aimed at providing emergency liquidity to the marketplace if necessary.

Like the bailout of Freddie Mac (FRE) and Fannie Mae (FNM) passed by Congress on Saturday, the hope is the new measures will never be drawn upon, and that their very existence would provide sufficient confidence to the market.

Also, like the troubled mortgage market, there has been evidence of predatory lending activity, said U.S. PIRG's Swarthout.

"There has been significant evidence of predatory student lending in the private student loans market," he said. "It contained many of the same aggressive lending practices as we saw in the subprime loan mortgage market, albeit on a much smaller scale."

The Financial Services Roundtable, a Washington group representing the financial-services industry, said it supported the enhanced disclosure in the bill.

"If the mortgage market has shown us nothing, more disclosure will help inform the borrowers," said Scott Talbot of the FSR.

The Higher Education Act's central thrust was the creation of a new scheme that would reward states that are able to keep college tuition levels down with higher levels of federal transfers.

Those states able to maintain tuition levels at the average level of the previous five years in that state would be able to benefit from the new plan.

The additional funding would be required to be spent on the poorest students who might not be able to afford to go to college otherwise, said a Democratic aide to the House education committee.

-By Corey Boles, Dow Jones Newswires; 202-862-6601; corey.boles@dowjones.com

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  07-31-08 2100ET
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