College tuition has risen by an average of 5.6% per year in the past decade, higher than the rate of general inflation, and the average graduate has between $22,000 and $28,000 in student loan debt. Parents are often confused about student loans, so they turn to credit cards to pay for their children’s college. Students themselves do not realize the importance of student loans and how their terms can affect them down the road. There is a growing trend in the use of nontraditional, high-priced private loans offered by, or in partnership with, for-profit colleges prior to a student exhausting all federal options available. These private loans are made with little to no evaluation of the students’ ability to repay the obligation. Colleges themselves have admitted that these loans will likely end up in default. Private loans generally come with variable interest rates and stricter repayment terms upon graduation.
In response, the Consumer Financial Protection Bureau (CFPB) is calling for greater transparency in the student lending market. The CFPB indicated that it hopes this scrutiny will spur competition among schools and lenders to create a fair marketplace. On October 25, 2011, the CFPB and the U.S. Department of Education unveiled a model disclosure form for presenting financial aid offers to students. These plans coincide with the recent White House announcement of plans, using an executive order, to cap monthly student loan payments at 10% of a student’s discretionary income and offer a .5% interest rate reduction for consolidating federal loans.
The CFPB has also released a student debt repayment assistance tool that provides information on incomebased repayment, deferments and alternative payment programs. The tool does not actually accept applications for loan modification, but it does ask a few basic questions to understand the user’s economic situation. The tool then uses this information to provide advice and guide borrowers through their various options.