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Student Loan Market Headed for Crisis, CFPB Warns

WASHINGTON — The swelling trillion-dollar student loan market is missing key data and regulations necessary to head off another financial crisis, according to Rohit Chopra, the Consumer Financial Protection Bureau’s top official in charge of dealing with student loans.

In speaking before the Federal Reserve Bank of St. Louis on Monday, Chopra said it would be “irresponsible for financial regulators” to avoid taking action now to shield the $1.2 trillion student loan debt market from a severe bust. Chopra said regulators could act on a range of options without waiting for Congressional intervention, including requiring lenders to disclose more data and instating policies that encourage the refinancing of student loans.

“We must resist the temptation to address these concerns solely through an education policy lens, when, in fact, they may require very significant attention from financial regulators and the financial services industry,” Chopra said. “Congress enacted a wide range of reforms to the mortgage market; and they may shed light on options to address the significant structural deficiencies in the student loan market.”

Chopra’s concerns stem from similarities to the housing market collapse, including a significant growth in student debt coupled with “heavy use” of government guarantees through federal loan programs. Roughly 40 million Americans have $1.2 trillion in student debt outstanding, according to the CFPB with each borrower holding an average of $30,000 in debt.

While such debt is increasing, the wages for recent graduates are decreasing. Real wages for a young college graduate dropped by 5.4% while they fell 11.1% for high school graduates between the years of 2000 and 2011, according to the CFPB’s analysis of the Current Population Survey

Chopra said that as younger graduates struggle to pay down higher student debt with lower wages, it will become more difficult for them to get approved for a mortgage and further impede the housing recovery.

“Outstanding student loan debt has doubled since 2007 — a stark contrast to the credit card and mortgage markets,” Chopra said. “Rising student debt burdens may prove to be one of the more striking aftershocks of the Great Recession, especially if continued to leave unaddressed.”

Chopra highlighted several options that can be addressed through regulation such as having institutions that securitize student loans in the secondary market hold 5% of the risk — much like the risk-retention rules for securitized mortgages required in the Dodd-Frank Act. He also suggested lenders make a “good faith effort” to ensure borrowers have an ability-to-repay, similar to what the CFPB now requires in the mortgage market.

Chopra acknowledged criticism that it’s more difficult to require ability-to-repay since student lending is based on the student paying their debt after they graduate and have higher-waging jobs.  But he contended that there other ways private student lenders can strengthen underwriting, such as some form of income-contingent plan commonly offered in federal loans.

“Private student lenders don’t offer these features and their loans were disproportionately utilized by students enrolled in programs with low graduation rates and high default rates,” Chopra said. “The Department of Education is currently seeking to address these moral hazard issues by addressing program eligibility for schools that may not be preparing graduates for employment that helps them repay their debt.”

Chopra also suggested that schools be paid by federal loan programs based on whether or not a student drops out of college.

“This may provide an incentive for schools, particularly for those who owe a fiduciary duty to shareholders, to focus primarily on enrollment rather than outcomes,” he said. “The similarity to a mortgage originator whose compensation is not dependent on loan performance is quite striking.”

Like the mortgage market, Chopra said he is also concerned with the lack of incentive for servicers to place struggling borrowers in some type of modification program. But he added that it was difficult to correctly analyze the default rates and success of modification programs since student loan data is aggregated with other non-mortgage loans when companies report financials to their regulator.

“While comprehensive data is not available, several major market participants in the federal guarantees program do not appear to be succeeding in enrolling struggling student loan borrowers in these income-contingent plans,” he said. “The CFPB and other regulators have made significant strides to assemble existing mortgage data to better monitor the market. Similar efforts are needed to better understand the drivers of student loan origination and performance, as well as the impact on household balance sheet composition and the mortgage market.”

The CFPB has already been calling on private student loan servicers to help struggling borrowers through some form of modification or lower payment plans but Chopra said the industry has made “little progress to date.” The CFPB has issued a proposal to supervise the largest non-bank private student loan servicers, which many observers expect to see finalized in the coming months.

“If finalized, the rule would create a level playing field between banks and nonbanks,” Chopra said in his prepared remarks. “Supervision can help correct deficiencies early, before harm becomes widespread.”


(5) Comments



Comments (5)
I am already in crisis with mine, $70000 in debt and I know Im not alone. I graduated with honors but that didnt help finding a job in this economy. I see several reasons for this but I am looking for a solution not only for myself but future graduates. Some of us look for any temporary relief when behind. Theres a website gofundme.com where you can help out struggling people with student loans and other things.
Heres mine as a sample

Posted by ccmac33 | Thursday, November 21 2013 at 3:19PM ET
The United States Department of Education ("ED"), since July 1, 2010, makes 93% of all student loans. The vast majority of the $1.2 Trillion outstanding were made by ED. ED charges borrowers 6.8% to 7.9%, while raising funds at next-to-nothing Treasury rates. Yes, the Federal Government is the single largest PREDATORY lender in the world. Yet, the CFPB elects to attack private lenders and ingnore the real problem. When this blows up, remember where Mr. Chopra's focus was.
Posted by Hypocrit Detector | Tuesday, November 19 2013 at 2:38PM ET
My student loan debt is only $5K less than it was 15 years ago and I have with the exception of a few years during hardships (divorce) been paying on it faithfully. I acquired this despite 3.92 GPA while working full-time and single parenting because I was a white female unqualified for race based scholarships, and unable to compete for academic based ones with kids that got a 4.0. So my friends from India, China, Japan graduated debt free courtesy of our diversity initiatives while I walked away owing debt for the rest of my life because I had the misfortune to be of a particular genetic background. Ironic because in fact I was raised as a child of a disabled vet and grew up extremely poor while they had professional parents! Another problem is that payments don't apply to principal. Finally, school became the option for many who saw no opportunities in the marketplace. They were competing with the better educated who landed entry level jobs so the thought was to become what they saw won. Unfortunately, all of this points back to a country that has no concept of cause/effect. The changes in economic policies this past 15 years with banks and multinational corporations have killed the futures of many. Allowing technical manufacturers to offshore production has dramatically impacted opportunities for anyone bothering with an education. The loss of semiconductor manufacturing to Asia will have repercussions in ways we can't even begin to grasp. We definitely have no players in this game who understand long-term impacts or strategy. I am ashamed of the men & women purportedly leading our country for being so dense and short-sighted.
Posted by Mead0w0man | Tuesday, November 19 2013 at 11:48AM ET
Maybe if the Department of Education did not allow these horrible for-profit "colleges" and "universities" (they are businesses, period) to suck up a sickeningly massive amount of federal funding, then this debt problem would be NOWHERE near as awful as it is.
Posted by FinanceWoman79 | Tuesday, November 19 2013 at 11:12AM ET
Seems that as usual, government created the problem and government now is trying to dictate the solution. If you would stop providing guarantees for loans and let the free market work (which is almost now totally removed from the process) then true market fundamentals would have tampered down the amount of funds that are provided out, thus reducing the amount of funds that colleges are sucking up, therefore holding down the stratospheric price increases we've seen. Personally, the best they can do now is to restart the free market system and pick up the pieces when the existing market implodes (and it will).
Posted by BankerBud | Tuesday, November 19 2013 at 9:44AM ET
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