On Thursday Obama’s consumer protection bureau announced it would begin “gathering information” on how to reorganize private student loan repayment.
The Consumer Financial Protection Bureau (CFPB), the brainchild of Sen. Elizabeth Warren (D-MA), asked to hear from teachers who “can’t afford to teach in their hometowns,” doctors who “feel forced to specialize” and other people who put off owning a home or other major investments thanks to student loan debt.
“We’re very happy with the efforts and the gains that the CFPB is making toward adjusting private student loans, which is an industry that is really not friendly to students,” said Kalwis Lo, the legislative director at the United States Student Association (USSA), which has worked closely with CFPB on this process. “We’re hoping the CFPB can make strengthened measures to address a lot of the difficulties that students are having around trying to make payments on private student loans.”
“A lot of the students who are taking out loans for the very first time are 17 or 18,” Lo continued. These are “the biggest financial decisions that they’re making for the first time in their lives.”
Without understanding what they’re signing, Lo said, it can “lead to default.”
While the idea of crowdsourcing a solution to debt is relatively new, the idea that private student loans are predatory and dangerous is not. The CFPB issued a report last October documenting the abuses in the private student loan industry, which the report likened repeatedly to the sub-prime mortgage industry.
That report documented that, of the complaints they collected from March to September 2012, 65 percent of student borrowers faced problems with repaying their loan, such as refinancing or deferring payments, and 30 percent reported problems with the inability to pay. It also found that more than $8 billion of the $1 trillion in outstanding student debt was accounted for with difficult-to-refinance private student loans.
A little-known fact about private student loans is that Congress changed bankruptcy law in 2005 so that borrowers are legally barred from discharging them in bankruptcy, categorizing them with other non-dischargeable debt like child-support payments, tax liens and criminal fines. Some exceptions for private student loan bankruptcy have been granted, but the borrow has to prove the loans pose an “undue burden.”
This option isn’t exercised as often as it could be. As a recent study of bankruptcy cases found, though judges granted at least some relief in 40 percent of cases in which borrower asked for student debt relief, only .1 percent of all those facing bankruptcy who carried student loans even asked to be relieved of them.
And while it looks like the CFPB is ready to begin taking action on private student loans, the acting director Richard Cordray has yet to be confirmed by the Senate. His confirmation might be made more difficult by the fact that Republican Sens. Mike Johanns (NE), Lamar Alexander (TN) and John Cornyn (TX) have introduced a bill on Thursday to halt all funding to the CFPB until Cordray is confirmed.
Meanwhile, in Congress, Sen. Tom Harkin (D-IA), who recently announced his 2014 retirement, has introduced several bills that would address the problem of private student loan bankruptcy, though none have made it to a vote.
In a December speech, Harkin compared private student lenders to “debtors prisons of Europe and England.”
“Charles Dickens would have a ball with this standard,” Harkin said.
[Photo via Shutterstock]
[Correction: Thos article was initially headlined “Consumer protection begins regulation of private student loans.”]