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June 19, 2012 9:28 AM Borrowers Confused, Frustrated by Student Loans

By Danny Vinik

The Consumer Financial Protection Bureau (CFPB) published nearly 2,000 comments on private student loans last Wednesday from students, parents and school administrators across the country. The CFPB launched a student loan complaint system to assist borrowers confused and/or struggling with their student debt. The Bureau plans to use all of the comments to craft specific regulations to help consumers navigate the private student loan industry without unnecessarily burdening the lenders. Consumers submitted comments over the past few months either online or through the mail, relaying their complaints about any and all aspects of the industry. The overwhelming conclusion: the private student loan industry is extremely confusing.

While many students believe the private student loan industry has similar rules and options as the federal student loan industry; that is not the case. The U.S. government issues the federal student loans, which generally have a fixed rate, while banks and other lenders issue private student loans. Federal loans are limited in supply, however, forcing many students to turn to the private industry. These private loans generally have higher interest rates and are less forgiving to borrowers. For instance, federal student loans allow borrowers to adjust their monthly payment depending on their economic status; borrowers only have to pay back a certain percentage of their income each month. The private student loan industry does not include this valuable provision, though many borrowers believe it does.

The lack of transparency has created great confusion and saddled borrowers with debts they cannot pay. As of the end of May, there is $904 billion of student loan debt currently outstanding in the U.S., an eight percent increase from year. Many of the comments to the CFPB reveal how burdensome these debts are.

One borrower wrote, “We’ve decided not to have a family because we can’t come up with a way that we’d ever be able to afford it. We also postponed our wedding an entire year. We’re hoping nothing happens to our cars, or that either one of us gets really sick, as we don’t have any savings or an emergency fund. We won’t be able to buy a house, ever.”

Another noted, “I called Chase Bank this past month to ask for a 1 month deference or at least help because I wouldn’t be able to work for a while. I’m having a baby in the next week. They denied me and told me to get money from other sources. I can’t.”

In some cases, borrowers cannot even figure out who they owe money to. As one such borrower commented, “I have a private loan that has been passed around and I can’t seem to get ahold of anyone about it.”

Along with the confusing practices of the private student loan industry, the CFPB also revealed another scary trend: the compliance of schools.

In the worst cases, school financial aid officers or other school staff provides inaccurate information in order to lure borrowers into private loans or otherwise pressure borrowers to take out these loans. Particularly during the heyday of predatory lending, many lenders aggressively marketed their student loan products directly to consumers and schools promoted “approved” lenders that gave kickbacks to the school.

The CFPB, formed under the Dodd-Frank bill, has been looking to eliminate this confusion and force the private student loan industry to explicitly display all features of their loans. Passed in 2010, the Dodd-Frank bill strengthens financial regulation and increases consumer protection in the aftermath of the 2007 financial crisis. The bill is a reaction to the steep rise in sub-prime lending that preceded the housing crisis. The Bureau’s “Know Before You Owe” program has a stated goal of “making costs and risks clearer” in the mortgage, credit card, and student loan industries. While these comments are a good first step in providing regulation to accomplish that goal, they also demonstrate the need for quick action from the agency as many borrowers continue to struggle with high levels of debt. .

Without tougher rules, more and more borrowers will turn to the confusing private sector and the mountain of student debt will just continue to grow.

Danny Vinik is an intern at the Washington Monthly.

Comments

  • Dr. Jim Andrews on June 19, 2012 1:38 PM:

    Private student loans are NOT the problem.

    The unfortunate reality is that private student loans (from banks) only represent about 7 percent of the $1 trillion in student loans currently out there.

    The rest of the pot is made up of federal student loans from the government. Federal loans are given away like candy and are responsible for the vast majority of defaults.

    And when federal student loans default, the taxpayer is on the hook.

  • Cragie on June 20, 2012 10:35 AM:

    Except, Dr. Jim, that the federal government earns a net gain on Direct Loans, plus a net gain on the FFELs that default. The Direct Loan program makes tons of money. We would have to increase taxes to make up for the program if it were suddenly repealed. And those savings have already been spent -- loans are on accrual accounting. In other words, the net profit on the 2013 federal Direct Loans has already been spent on things like the Iraq War.

    Privately-guaranteed loans are not the answer. (Yes, Virginia, despite what the lenders say, all loans are guaranteed. "Supplemental" alternative loans are guaranteed by private guarantors such as HEMAR and TERI. No need for a taxpayer bailout.)

    Poor Americans and Americans with weak credit pay upwards of 18 to 25 percent on car loans, despite the existence of collateral. Those rates are similar to what "high risk" students pay for education loans that are privately-guaranteed. When Computer Learning Centers collapsed several years ago, it was discovered how many of those loans were 20%+.