The Consumer Financial Protection Bureau sent out a request for input on the student loan crisis – specifically on the struggles of those overburdened with private student loan debt. While those with federal student loans have many options available including income-sensitive plans, private debtors do not have these flexible options. CFPB has collated the responses and has prepared a report to present their findings. You can read the full report here.
What the CFPB found was that those owing the most in student debt are most likely to have private loans in the mix. CFPB writes: “Of these undergraduate borrowers graduating with $40,000 or more in student loans, 81 percent had private student loans.” The overwhelming input was to restructure loans to make them more affordable.
The main obstacle reported to restructuring private loans is that lenders are not incentivized. CFPB writes: “Loan holders may perceive the costs of restructuring to be greater than the potential benefits of doing so.” Another issue is that private student loans are in portfolios mixed in with other investments in complex financial arrangements and so it may be difficult to extricate them to refinance or restructure.
Here are the main points of concern that commenters raised:
#1 Minimize Profit-Seeking While Restructuring
CFPB reported that the public at large thinks private loans should be allowed to convert to federal loans. But others were concerned that companies such as for-profit schools are knowingly making loans they know will have a high rate of default and they should not be allowed to improperly profit. The upshot from our perspective is that troubled borrowers need a solution, but that private companies shouldn’t be allowed to profit excessively from the restructuring.
#2 Lender Concessions Should Be Required
Other suggestions included setting up a program administrator to help restructure private loans. CFPB says lenders should offer concessions to reach an acceptable debt-to-income ratio so that borrowers can afford to service their student loan debt. Suggested concessions include interest rate reductions, term extensions, forbearance and reduction in principle amount.
#3 Increased Transparency and Documentation Requirements
The CFPB report suggests that if a restructuring program is put in place that it be based on a published process so that borrowers could clearly understand their options and what their payments likely will be after the restructuring. Suggestions were also made that everything be income-based so that borrowers can’t change their behavior to qualify for plans they would not otherwise be eligible for.
#4 Compliance Functions
Suggestions were also made to CFPB that if a restructuring program was established with public funding support that there should also be rigorous compliance measures put in place to prevent undue losses of public funds or lenders/borrowers taking advantage of the program.
#5 Credit Rehabilitation Options
CFPB responses also suggested that borrowers who have defaulted on their private student loans be allowed to rebuild their credit. The suggestions were that a program be instituted similar to the way federal student loans are rehabbed for credit purposes. CFPB also noted that this might require changes to the laws on credit reporting. The rationale behind this recommendation is that it could help grads pass pre-employment credit checks so they have no hindrance to full-time employability.
Other Issues for Consideration
Toward the end of their report, CFPB says both their director and the Secretary of Education “recommended that Congress seek to provide a way for consumers to see a complete picture of their student loan debt.” They mention that the National Student Loan Data System (NSLDS) helps federal borrowers see all of their loans, but says there’s no source for private borrowers – which is not accurate!
In fact, Tuition.io’s free student loan tool allows borrowers to view all of their federal and private student loans in one easy to use interface. You can see your loans, balances, pay off dates and for federal loans, you can check out repayment options. For all loans, you are also able to contact your lenders using our tool. We are fulfilling an important need (as recognized by CFPB and DOE) and encourage you to use our free tool to get control of your debt!
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