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February 26, 2013 2:15 PM Private Student Loans Are A Tiny Part of the Debt Problem

By Daniel Luzer

The Consumer Financial Protection Bureau, the newly-created agency in charge of protecting the interest of consumers and promoting fair business practices, announced last week that it will begin to investigate private students loans, which represent $150 billion worth of student debt.

It’s probably about time to start thinking about refinancing options for private loans, but this effort is unlikely to have much impact on the real student debt problem. According to the CFPB:

Today, the Consumer Financial Protection Bureau (CFPB) announced that it is gathering information to develop options for policymakers to make repayment of private student loans more manageable for struggling borrowers. The CFPB has found that private student loan borrowers who wish to pay their loans, but face high payments, lack alternative repayment and refinance options.
In October 2012, the CFPB Student Loan Ombudsman released a report noting that consumers had trouble negotiating affordable repayment plans with their lenders and servicers for private student loans - loans that are not designed with income-based payment options.
The CFPB plans to explore more detailed recommendations to policymakers in order to facilitate greater repayment affordability of private student loans.

The CFPB is still in the “gathering information” stage but this project is potentially important because, as CFPB Student Loan Ombudsman Rohit Chopra said, “If you think everything in this market is hunky-dory, you are completely missing the warning signs. Many of us have raised questions about the student debt domino effect on the economy.”

He’s right, but there’s not much the CFPB can really do about this. It’s true that private student loans are more likely to have onerous terms for borrowers. The repayment options for private student loans don’t have the same protections as federal students loans, which means that consumers can be hurt a great deal as a result of their private loans.

But there’s no indication that fixing the rules for private student loans (or even, frankly, zeroing them out altogether) would have much impact on student finances. That’s because private student loans are a very small part of the education debt problem. The federal government owns some 85 percent of student loans. Only 15 percent of student loans are privately held.

It’s true that as a consumer protection agency the CFPB is right to target the one part of student debt that is consumer based. But if the point is to really impact the debt problem, this will do little.

Targeting private student loans in an effort to address “the student debt domino effect on the economy” is sort of like trying to fix climate change by focusing only on the carbon emissions of Europe. Yes that would be a smart way to simulate major effort, but the ultimate impact on the problem would be minimal.

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer

Comments

  • Mark Kantrowitz on February 27, 2013 8:40 AM:

    Although private student loans represent 15% of education debt outstanding, and 7% of new student loan debt, most students who graduate with excessive student loan debt borrowed from private student loan programs. The aggregate Stafford loan limit for dependent undergraduate students, for example, is $31,000; for independent students it is $57,500. To have debt out of sync with income after graduation, borrowing private student loans is often a prerequisite. Even among graduate students, who have higher loan limits, most students who graduate with too much debt have private student loans. See http://www.finaid.org/educators/20120801sixfiguredebt.pdf and http://www.finaid.org/educators/20090511excessivedebt.pdf. Private student loans aren't entirely to blame, as students at higher-cost colleges are more likely to graduate with excessive debt, but they are an important part of the problem and lenders can contribute to the solutions.

  • FLGuy on February 27, 2013 9:34 AM:

    This article seems to ignore the fact that people can control their payments on federal loans and still live their life through the income contingent payment programs.

    Also, creating a refinancing culture for private loans could be applied to federal loans too.

  • Jim Andrews on February 27, 2013 12:42 PM:

    100% correct.

    The true goal of the CFPB is not to protect consumers of student loans...

    But rather to push private banks and all private financing out of the student loan business. This is about Obama seeking total control of education financing.

    All one has to do is look at the DEFAULT rate of private loans vs federal private loans, and it is immediately apparent where the real problem lies.

  • electedface on February 27, 2013 2:10 PM:

    Student debt is stunting the growth of the economy. Student loans have increased by 500% over past decade. As the next generation graduates from college, they are plagued by insurmountable debt that places demands on their income, limiting their ability to spend their earnings in ways that stimulate the economy.