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Thinking About Debt Relief
WASHINGTON -- In the next move for a federal agency ratcheting up its oversight of student loans, the Consumer Financial Protection Bureau is asking borrowers, lenders and others for feedback on what can be done to ease the burden of private student debt.
The request for information is the latest indication that the bureau is interested in stepping up regulation of private student loans. Private loans make less than 15 percent of all outstanding student loans. But because interest rates are higher and repayment options less flexible than for federal loans, they’re frequently a source of consumer complaint.
Last year, the agency collected more than 2,000 complaints from private loan borrowers (as well as some confused commenters with federal loans, since many borrowers have difficulty telling the difference) and published a report recommending new regulations for private loans. Among the recommendations: that Congress reconsider a 2005 law that made it much more difficult to discharge private loans in bankruptcy.
Today’s notice suggests that the bureau wants to change borrowers’ options before bankruptcy as well. The private student loan market could benefit if borrowers are given the option to refinance, bureau officials wrote in the notice. They pointed to similarities between private loans and mortgages, including that underwriting practices have improved since the financial meltdown and the fact that loans can be sold to third-party servicers. But they also noted differences, most notably that -- unlike a mortgage -- private loans include no asset that can be repossessed if borrowers default.
The notice includes questions about the interplay between federal and private loans in repayment; characteristics that predict delinquency or default; options for borrowers in distress to lower monthly payments; the effect student loans have on the ability to obtain mortgages and auto loans; and servicing infrastructure. It also asks about examples of past, successful loan modification programs sponsored either by a public entity or the private sector -- a clear signal that the bureau is weighing recommendations on a refinancing program.
Agency officials would not speculate on how a private loan modification program might work. But Campus Progress, a branch of the Center for American Progress that last week issued a report calling for refinancing for both federal and private student loans, offered a few ideas.
The Education Department could offer raise existing borrowing limits and offer new loans to borrowers in repayment, who would use that money to pay off the private loan -- essentially swapping one loan for another, said Tobin Van Ostern, deputy director of Campus Progress. Or the federal government could set up a fund, either on its own or with private capital as well, to purchase and modify student loans.
“There’s a real need and appetite to deal with a lot of the remaining student debt that’s out there,” Van Ostern said. “There needs to be more done to help those people with existing debt repay their loans or modify their loans, and I think that is a need the CFPB has recognized.”
When concern over student debt peaked last summer, some commenters warned of a student-loan bubble that could harm the economy as more borrowers default. Rohit Chopra, the bureau's student loan ombudsman, focused instead on another theory that has gained currency in recent months: that large student-loan payments are a drag on the economy because they depress consumption and can delay purchases of big-ticket items like houses and cars.
“Policymakers may need to take steps to inoculate the economy from harm posed by student debt burdens on young consumers,” Chopra said in a call with reporters Thursday afternoon.
The agency’s job is to make recommendations to Congress, the Education Department and the Treasury Department, among other federal agencies, on new policies to protect consumers. Implementing any such recommendations -- particularly a private loan refinancing program -- would be another matter in a budget-conscious Congress. (On Chopra’s press call Thursday, it took less than 20 minutes for the word “bailout” to be mentioned -- not, of course, by the agency.) Van Ostern said some options, such as allowing borrowers to take out federal loans to pay back private loans, could be done at little cost because student loans make a profit for the federal government, but others would require more spending.
Chopra said the bureau was not looking to create new mandates for private lenders -- such as requiring that all private student loans offer an income-based repayment option.
“We’re looking for solutions that might involve partnerships between industry actors, and we’re looking for ways that there can be win-win solutions for borrowers and lenders,” he said. “We ask specific questions about how the public may be able to facilitate that.”
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