According to the Consumer Financial Protection Bureau (CFPB), there are over 38 million student borrowers accumulating $1.1 trillion of student loan debt. While most student borrowers are turning to federal loans, a significant portion still turn to private loans.
Government-backed student loans have comparably lower interest rates and have repayment plans that keep payment amounts proportional to income. Private borrows don’t enjoy these perks. The CFPB report, released on May 8, analyzes public input promoting more affordable ways to handle private loans:
“Commenters suggested a number of options for policymakers to spur affordable repayment options on private student loans so that a substantial number of consumers might participate more fully in the economy.”
“Some commenters put forth potential principles should policymakers pursue programs that would encourage lenders to make concessions and restructure loans.”
“Commenters also described opportunities for private student loan borrowers to repair their credit if they successfully repay a restructured loan.”
“Others suggested mechanisms to jumpstart a refinance market, so that borrowers might better take advantage of today’s interest rate environment and their improved credit profile”
The CFPB goes on to list scenarios in which a high level of student loan burden damages economic opportunity and growth. If borrowers spend most of their resources paying these loans, the less likely they’ll be consuming. This affects the ability of public healthcare administrations and the government to fund retirement benefits. It’s the common argument for low-interest borrowing and friendly payment methods.
The report makes five recommendations for reforms in refinancing private student loans.
One recommendation is the creation of a middle-man that represents the borrower, likely a government agency or agent, called a “program administrator.” This can create more leverage for borrowers when making negotiations for refinancing.
Building off that, the CFPB calls for more transparency on both sides of the loan process. Documentation from the borrower would help program administrators better understand what concessions can be made with the lender.
Another suggestion is creating loss-sharing after loan defaults; however, the CFPB says that general economic conditions would dictate this option. It says it would be “imprudent” to put tax dollars at risk for a lender’s activities.
The last two recommendations involve the creation of rules for compliance and assistance for building a borrower’s credit.
The report warns that creating these borrower safety measures could be to the benefit of the financial institutions who give out these loans at the expense of government resources. The safety measures make risky loans not so risky.
Public comments and the CFPB’s responses may seem overly broad, but the report is only recommending solutions at the moment. Financial institutions, or lending parties, could be reluctant to subject themselves to federal intervention, but private student loans are shown to be unmanageable.
(Read the entire CFPB report on refinancing private student loans here.)