The Bureau and the Department of Education released a joint report last week stating that many student borrowers are struggling under the weight of private student loans, which surpassed $20 billion at their peak in 2008. The report indicates that lenders generally bundled and sold the loans quickly, and did little to ensure that the student loans could be paid back. CFPB director Richard Cordray stated the report shows “students were yet another group of consumers that were hurt by the boom and bust of the financial crisis.” According to Education Secretary Arne Duncan, “[s]ubprime-style lending went to college, and now students are paying the price.”
Private lending representatives have pushed back, stating that many of these problems have been addressed by recent regulations. For example, all federal loans have been issued only by the federal government since July 2010. In addition, more than 90 percent of private student loans were co-signed by a creditworthy individual, as compared to just 67 percent of those loans in 2006. School officials now review more than 90 percent of private loans to ensure that the aid matches the students’ needs. These recent improvements have made private lenders “quite concerned by the unfair implications that this segment of the consumer lending market ‘operates in the shadows,’” according to Tom Deutsch, Executive Director of the American Securitization Forum.
The CFPB/Department of Education report recommends that lawmakers consider ways to enable student borrowers to restructure loan debt in bankruptcy. The report further suggests that colleges be required to certify that the money a student borrows does not exceed his or her need. In addition, the report recommends that schools be required to determine whether a student has exhausted all federal aid before allowing a private loan to be made.
Last week the Bureau and Department of Education also presented a new financial aid form, called the Financial Aid Shopping Sheet. Noting that “[t]oo often students receive financial aid award letters that are laden with jargon, use inconsistent terms and calculations, and make it unnecessarily difficult to compare different financial awards side by side,” Cordray believes “[t]he form can help students understand how much debt they have after graduation and what their monthly payment could look like.”
“We still have some work to do to ensure that students who take out private loans have the same kinds of protections offered by federal loans,” acknowledged Secretary Duncan. “In the meantime, if you have to take out a loan to pay for college, federal student aid should be your first option.”