Bloomberg News on July 24, 2012
By Emma Fidel and Janet Lorin

Borrowers struggling with private student-loan debt would benefit from more refinancing options, a U.S. consumer protection official will tell Congress today.

Congress should focus more attention on expanding modification and refinancing options in the private market, Rohit Chopra, student loan ombudsman for the Consumer Financial Protection Bureau, said in testimony for a Senate Banking subcommittee hearing. The country’s mounting student loan debt threatens to “act as a drag on economic recovery,” he said.

“Policy makers have paid significant attention to the refinancing and modification conditions in the mortgage market,” Chopra said in the statement. “Given the potential impact of student debt on the broader economy, the situation is rapidly demonstrating the need for attention.”

The Senate panel is holding its hearing less than a week after publication of a government report that said students were victims of a “subprime-style” private loan market that contracted after the 2008 credit crisis.

The report, written by the consumer bureau and Education Department, recommends that Congress clarify the definition of private loans and require schools to certify the products.

Congress should also consider changing a bankruptcy procedure law enacted in 2005 that prevents private student loans from being discharged during bankruptcy, the report said.

U.S. agencies have intervened in the private student loan market in recent years, according to a footnote in Chopra’s statement. Citing “unusual and exigent circumstances,” the Federal Reserve Board of Governors exercised its authority to establish the Term Asset-Backed Securities Loan Facility, which facilitated the issuance of a wide range of ABS, including those backed by private student loans.

SLM Support

Jack Remondi, president and chief operating officer of Newark, Delaware-based SLM Corp. (SLM) (SLM), the education lender known as Sallie Mae, will conditionally support the government’s recommendations, according to his prepared testimony.

“Sallie Mae supports bankruptcy reform that would require a period of good-faith payments, that is prospective so as not to rewrite existing contracts, and that applies to federal and non-federal education loans alike,” Remondi said.

Senator Richard Durbin, an Illinois Democrat, has introduced two bills on private student loans, one reversing the bankruptcy discharge law and another with Senator Tom Harkin, an Iowa Democrat, that would require colleges to counsel students to take out the maximum in federal loans before venturing into the private market.

‘Going Nowhere’

The bills are “going nowhere,” Durbin said in Chicago yesterday in an interview at a meeting of the National Association of Student Financial Aid Administrators.

Outstanding educational debt taken out by students and their parents is about $1 trillion, according to the consumer agency. About 15 percent of the loans are privately originated, and don’t have federal loan protections such as fixed rates, deferment and income based repayment.

Support for the consumer bureau and Education Department recommendations will also come from consumer-advocacy groups, according to testimony prepared by Deanne Loonin, an attorney for the National Consumer Law Center who directs its Student Loan Borrower Assistance Project, and Jennifer Mishory, deputy director of Young Invincibles, a Washington-based group that describes itself as “a national organization committed to mobilizing and expanding opportunities for young Americans.”

To contact the reporters on this story: Emma Fidel in Washington at efidel@bloomberg.net; Janet Lorin in New York at jlorin@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net