Lots of reaction around the country to a damning report released today from the Consumer Financial Protection Bureau and the U.S. Department of Education on the shady tactics and misleading practices of the private student loan market.
According to the bureau, outstanding student loan debt topped $1 trillion in 2011 — $864 billion of federal student debt and approximately $150 billion of private student loan debt.
Among the findings in the report:
•Private student loans are riskier: Used appropriately, private student loans have a role to play in financing higher education. However, compared to federal student loans, private student loans often lack repayment flexibility and other protections when borrowers are struggling to make ends meet. Most private loans have few options for payment modification or forbearance. Federal loans have a fixed interest rate and most private loans have variable rates, making estimates about future debt payments difficult. Prior to 2010, federal law did not require a disclosure showing the actual interest rate on a borrower’s loan until after the lender documented the loan, approved the credit, and readied the check for mailing.
•Lax underwriting practices rise during boom: Some lenders bypassed school financial aid offices and marketed loans directly to students. As a result, in many cases, the school could not review the borrower’s financial need, compare it to the loan amount, or even verify that the borrower was enrolled. Many lenders also lowered the minimum credit score required to receive a private student loan so that they could originate and then sell off more loans. Many students did not understand the differences and features between federal and private loans. They ended up using riskier private loans before exhausting their safer federal options.
•Borrowers are trapped after bust: Defaults on private student loans have increased since the financial crisis. Based on the CFPB’s sample, there are now over $8.1 billion in defaulted private loans, representing more than 850,000 distinct loans. Congress amended the bankruptcy code in 2005 to make it tougher to discharge private student loans. There is little to no evidence that there was an improvement in price and it is unclear that there was an increase in access to credit as a result of these changes. Borrowers reported their lenders were unable or unwilling to modify or adjust repayment terms.
“Our findings reveal that students were yet another group of consumers that were hurt by the boom and bust of the financial crisis,” said CFPB Director Richard Cordray in a statement. “Too many student loan borrowers are struggling to pay off private student loans that they did not understand and cannot afford. Moving forward, we must do our best to leave the next generation in a better place than we are today, rather than buried under a mountain of debt.”
“Subprime-style lending went to college and now students are paying the price,” said U.S. Education Secretary Arne Duncan. “We still have some work to do to ensure that students who take out private student loans have the same kinds of protections offered by federal loans. In the meantime, if you have to take out a loan to pay for college, federal student aid should be your first option.”
Here is a statement from Sen. Tom Harkin, D-Iowa, chairman of the Senate Committee on Health, Education, Labor and Pensions:
“With student loan debt at a record level, we must empower students and families to make informed decisions about how they finance their college education. This is particularly important when it comes to high-risk and high-cost private loans, which can quickly sink students into financial quicksand.
“Today’s report underscores the need for legislation I have sponsored in the Senate to educate students about their federal financial aid options before they turn to private student loans, which could lower default rates and curb unnecessary debt. It also highlights the need to provide relief to students by making private loans dischargeable in bankruptcy again just like all other forms of private debt, which pending legislation I’ve cosponsored would accomplish.
“The findings in this report are especially troubling for students attending for-profit colleges, who are many times more likely to take out private loans than other students. As Chairman of the HELP Committee, I will carefully examine the report’s recommendations and will continue to work hard to improve college affordability and address the student debt that burdens America’s middle class families. Ensuring that students exhaust their federal aid options before turning to private loans would be a good first step.
–From Maureen Downey, for the AJC Get Schooled blog