Private Student Loans Under the Microscope

Oct 16, 2014
Paying for College, Student Loans

Since I used to have a company to increase transparency in the private student loan market, I cannot pretend to be surprised at the recent CFPB report that highlights the downside of this product.  Since federal student loan limits are set at $31,000 for dependent students and $57,000 for independent students, many would argue that a good rule of thumb is to avoid these private student loans altogether.  When you are teaching your students about how to pay for college, this might be a useful resource for students to help them understand the differences between federal and private student loans.

So, what exactly is in the CFPB report?  In summary:  When it comes to working with financially stressed student loan borrowers, federal student loans offer more flexible repayment options compared to private student loans:

Many consumers who borrowed private student loans during the subprime boom
graduated from college into an extremely challenging labor market. While federal
student loans offer options to avoid default through several loan modification and
alternative repayment programs, lenders and servicers of private student loans generally
do not.

CFPB also raises a broader policy issue of whether the difficulty of discharging these loans in bankruptcy may be responsible for the intransigence of private student loan servicers:

Policymakers and market participants may wish to consider the impact of certain public
policies and market features when evaluating steps to improve options for borrowers in
distress, including whether changes to the treatment of private student loans in
bankruptcy proceedings are reducing incentives for lenders and servicers to help
borrowers avoid default.

What other points are the media focusing on?

  • Cleveland Plain Dealer provides information on tools that the CFPB has developed to help struggling borrowers:

Thursday, the CFPB threw struggling borrowers, if not a lifeline, at least a life jacket.  The bureau created two new tools student-loan borrowers can use to try to pry a repayment plan from a private lender.  The first is a worksheet that troubled borrowers can use to figure out what size monthly payment they can afford.  Once borrowers determine what they can afford, they can use a sample letter to ask their lenders about repayment options.

Private student loan borrowers are increasingly telling regulators that they’re at risk of defaulting on unaffordable payments but that lenders and loan servicers aren’t budging. In a report released Thursday, the Consumer Financial Protection Bureau, or CFPB, says private student loan complaints are up 38 percent from last year, to 5,300.  Borrowers said they couldn’t find clear information about how to avoid default, or were rebuffed when they sought reduced payment plans. Some were told they could obtain help with their loans only if they defaulted first.

Borrowers with private student loans face increasingly uncertain—and often conflicting—information from the servicers of those loans, says a report issued on Thursday by the Consumer Financial Protection Bureau.

According to the annual report, the bureau received 5,300 complaints from borrowers about their student loans from October 2013 to September 2014, an increase of 38 percent from the previous year. Fifty-seven percent of the complaints cited difficulties in negotiating with servicers and repaying loans; 41 percent came from borrowers who said they had sought help when they were unable to continue paying their loans.

  • CBS News highlighted the difference between repayment options for private and federal student loans:

When you get into trouble with a government student loan, there are nothing but options — deferral, forbearance and flexible repayment plans that allow you to pay what you can afford. But with private student loans, those made by individual lenders rather than the federal government, affordable options are so limited that graduates say they’re virtually forced into default.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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