Lax oversight and aggressive marketing of private student loans in the mid-2000s have contributed to cumulative defaults in excess of $8 billion, according to a new report from the Consumer Financial Protection Bureau and U.S. Department of Education.
In a report released July 20, the CFPB and Education Department outlined several recommendations aimed at shoring up the private student loan market, including one in which schools certify all private student loans.
The joint report was submitted to Congress as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Consumers currently owe more than $150 billion in outstanding private student loan debt, in addition to an estimated $900 billion in government loan debt.
Between 2005 and 2007, the percentage of loans to undergraduates made without school involvement or certification grew from 40 percent to 70 percent, as lenders increasingly marketed their loan products directly to students, the report states.
Similarly, the market for private student loans supplied by financial institutions grew to more than $20 billion in 2008 from less than $5 billion in 2001, before dropping to less than $6 billion in 2011.
Consumer debt attorney Leslie Tayne said the biggest problem is that students are not equipped to understand the long-term implications of taking out more than they need in private loans.
“When you”™re 17, 18, 19 years old, it”™s really easy to take student loans ”“ you just sign on the bottom line and you don”™t really pay attention,” Tayne, whose firm, Law Offices of Leslie H. Tayne P.C., has locations in White Plains, Mount Kisco, New York City and Long Island.
While outstanding government student loans far exceed private student loans, Tayne said the latter “tend to be more difficult in terms of options available to you.”
Government lending programs often have multiple repayment programs that allow students to pay back loans in smaller increments over a longer period of time.
Tayne said that with private loans, there is sometimes the option for the consumer to negotiate a settlement with their lender. Absent that, however, it can be all too easy to fall into delinquency and default, she said.
“I find that the student loan is the last debt to be paid, partly because of the problems in repaying them and partly because people ignore them early on,” Tayne said. “People pay their credit card bills because they need to buy gas tomorrow,” whereas they don”™t automatically see the need to keep up with student loan payments, she said.
Tayne recommended that those who are overburdened with loan payments talk to their lender before they are in default.
“We have lots of people who come to us when they”™ve received notices on levied bank accounts and garnished wages,” she said. “At that point, you really have gotten to a point where it”™s now a very desperate situation and your options become much more limited.”
The CFPB report notes that lenders have significantly reformed their student lending practices since the 2008 recession, with more loans requiring co-signers and a college”™s certification, but in many instances, the damage was already done.
According to the report, 10 percent of recent graduates of four-year colleges have monthly payments for all education loans that exceed 25 percent of their income.
More than 850,000 private student loans are currently in default, totaling $8 billion.
During the mid-2000s, due to the lack of oversight and certification of private loans by colleges, increasing amounts of student borrowers did not exhaust their federal Stafford loan limits before seeking private loans, the report states.
In the time since the recession, financial institution practices have become more stringent. The number of student loans with a co-signer increased from 67 percent in 2008 to more than 85 percent in 2009 and more than 90 percent in 2011.
In 2011, 90 percent of private student loans to undergraduates required the school to certify the student”™s need for additional financial assistance.
In addition to a recommendation for requiring school certification of all private student loans, the CFPB report recommends that Congress look into whether changes are needed in the way private student loans are treated in bankruptcy proceedings, whether the definition of a private student loan could be clarified and whether more mechanisms could be provided that would offer borrowers a better understanding of their student loan options.
