The Consumer Financial Protection Bureau's recent report on private student loans drew a sharp critique from lenders, who claim that the CFPB unfairly singles out private loans while ignoring problems with federal student loans. While the federal loan program has issues of its own, private student loans have distinct concerns.
Congress instructed the CFPB to pay special attention to private loans precisely because they have a problematic history of causing long-term financial distress to borrowers. In the early 2000s, private student loans followed a path similar to mortgage lending. Securitization led to mushrooming growth of questionably underwritten, variable- and high-interest-rate loans, which suffered high default rates after the economy crashed. Many borrowers today suffer from the loans made before the market corrected.
Recent data does suggest that some lenders have improved their private student loan underwriting standards, but problems remain. Federal student loans offer greater consumer protections than private loans, yet many of the students who take out private loans do not first exhaust their federal options. This means that they are unable to access such options as guaranteed income-based repayment and loan forgiveness plans, assistance for getting out of default and discharges for disability or death. Since both federal and private student loans are much more difficult to discharge in bankruptcy than other kinds of debt, these protections are crucial.
Colleges can play a role in helping students accurately compare private loans to federal loans. Stronger school certification processes, which ensure that students receive full information about their federal and private options, would require colleges and lenders to coordinate with one another to help students choose wisely.
Private loans taken out by students at for-profit colleges also deserve particular attention. Twelve percent of all students attending for-profit colleges in 2011-2012 had private student loans, down from 40% in 2007-2008, according to the latest available data. As indicated by the CFPB's current lawsuits against Corinthian Colleges and ITT Tech, the private student loan programs created by for-profit colleges in concert with lenders and other third parties after the credit market constricted were often based on deception and other illegal practices. These programs may still be making loans with very high default rates. Regulators should take swift action to ensure that Corinthian and other for-profit colleges do not continue these programs and seek restitution for borrowers. Banking regulators should also advise their financial institutions that these are high-risk programs.
Private lenders and servicers should also work harder to find ways to help distressed student borrowers. As the CFPB report details, many distressed borrowers want to repay their loans but cannot get help modifying their terms. Last year, lenders claimed that accounting principles hindered them from offering workouts to private student loan borrowers. Regulators have since made clear that banks may offer workouts without fearing criticism and encouraged them to help borrowers. The industry should follow that suggestion and craft an approach to private student loans that better suits borrowers' needs.
The CFPB report draws proper attention to this area of student lending. Congress unambiguously mandated that the CFPB collect, analyze, and report on private student loan complaints. Consumer complaints have always been a key way for law enforcement to identify possible violations of the law and for policymakers to identify areas of concern. Now that authorities have the information they need, they should act to address problems in this market.
Maura Dundon is senior policy counsel at the Center for Responsible Lending. Follow her on Twitter at @MauraDundon.