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No Easy Answer on Private Loans

Inside Higher Ed on May 9, 2013
By Libby A. Nelson

WASHINGTON — A federal agency released a report Wednesday examining ways to help borrowers of private student loans, but the agency made few clear-cut recommendations on helping borrowers refinance private loans or lower monthly payments.

Since it was established in 2011, the Consumer Financial Protection Bureau has devoted time and resources to student debt, particularly private student loans. The bureau issued a report to Congress in July that compared the loans to subprime mortgages and urged Congress to reconsider laws barring borrowers from discharging student loans in bankruptcy.

In some ways, the agency’s hands are tied on student loans. While it has stepped up investigations and oversight, new regulations would require Congressional action — something  unlikely to happen, given that Republicans who control the House of Representatives are hostile to the consumer bureau. But the bureau’s director, Richard Cordray, said that “much more needs to be done” for student debtors, particularly those with private loans.

“A college degree has the potential to become more of a burden than a blessing for those settled with unmanageable debt in a tough employment market,” Cordray said.

In his remarks, Cordray compared private student loans to mortgages. It’s a characterization that some lenders dispute — unlike mortgages, student loans have no collateral to repossess — but the comparison hints that the agency’s focus on private student loans will continue, because the CFPB has pursued high-profile enforcement against mortgage lenders and servicers.

Private loans make up only a small portion of the more than $1 trillion in outstanding student loan debt. But the loans don’t have some of the options of federal loans, such as an income-based repayment program with eventual loan forgiveness, and typically have higher interest rates.

The agency’s report, an overview of comments it received in response to a request for information in February, did not offer clear recommendations on what Congress or the Education Department might do to help struggling private loan borrowers. Many of the comments, including more than 9,000 collected by Young Invincibles, a group for Americans under 35, were from borrowers complaining about unmanageable debt. In an online survey, Young Invincibles found that 43 percent of borrowers found it “very difficult” to make their payments on private loans.

Officials seemed most interested in finding ways to encourage refinancing of private student loans. Many borrowers who took out the loans while they were in college — with little to no credit history, minimal income and perhaps a co-signer with a poor credit score — are now in a much stronger position financially now. If they had taken out a mortgage instead of a student loan, officials wrote in the bureau’s report, “it would not be uncommon for the borrower to seek more attractive terms.”

But there are few options for borrowers looking to refinance private student loans. The agency’s report included an overview of some measures that might help, including a database that can give borrowers a more complete picture of their student loan debts.

A centralized source on private loan debt could help “an auction-like marketplace” to emerge, where lenders, credit unions and others could compete to offer better refinance terms, the bureau suggested.

Refinancing would be most likely to help borrowers who have kept up on payments, even if their interest rates are higher than they would like. For borrowers who are struggling, the bureau suggested principles for restructuring private student loans. A government agency could work with private lenders to ease monthly payments and lower borrowers’ debt-to-income ratio.

The large-scale economic benefits of such a program might outweigh the costs, the bureau wrote in its report. It emphasized that unmanageable student debt could hold back would-be entrepreneurs or homebuyers who can’t get loans. Still, private loan modifications “would require significant policy and operational considerations that should not be underestimated.”

The bureau also suggested credit rehabilitation for private loan borrowers who are able to get their accounts back in good standing with new loan terms. A similar program already exists for rehabilitating federal student loans.

But a solution proposed by Campus Progress, a branch of the Center for American Progress, in February — a large-scale government purchase of private student loans that would lower interest rates and open up repayment options — met with skepticism. “Outright loan purchases could lead to extraordinary gains by certain lenders and investors who originated very risky loans,” the bureau wrote, adding that lenders who made the riskiest loans would benefit the most.

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