Consumer Financial Protection Bureau Reports on Private Student Loans
July 26, 2012
The Consumer Financial Protection Bureau (CFPB) recently released its report on the $150 billion private student loan market , fulfilling a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The CFPB report uses the same definition of a private student loan (PSL) as the Truth in Lending Act: Any loan made expressly, in whole or in part, for postsecondary education expenses that is not made or guaranteed under Title IV of the Higher Education Act, an open-ended credit plan, or secured by real property or a dwelling.
The Dodd-Frank Act required the CFPB to address the following topics:
- The private lenders—their market and products, as they have evolved and performed over time.
- The consumers of these products—their characteristics, plus their shopping, usage, and repayment behaviors.
- Consumer protections, including recent changes and possible gaps.
- Fair lending compliance information currently available and its implications.
- Statutory or legislative recommendations to improve consumer protections.
According to the report, 14 percent of all undergraduates used private student loans, while 42 percent of undergraduates at for-profit colleges took out PSLs. Approximately 40 percent of these borrowers did not exhaust their federal Stafford Loan limits before turning to the private loans.
The PSL market grew from $5 billion in 2001 to more than $20 billion by 2008, then settled back to $6 billion in 2011. The growth period was fueled by high demand from investors for student loan asset-backed securities (known as SLABS), leading lenders to offer loans directly to students and—as in the sub-prime mortgage markets in the mid-2000s—to increase lending to students with low credit scores.
After 2008, more private lenders began requiring institutions to certify students’ need for loans. In 2011, for example, 90 percent of PSLs included that requirement. Additionally, many lenders began to require co-signers on loans, increasing from 67 percent of private lenders in 2008 to more than 90 percent in 2011.
The results, say the report’s authors, include cumulative defaults on more than 850,000 individual PSLs exceeding $8 billion. In addition, 10 percent of recent graduates have monthly payments for all education loans that exceed 25 percent of their income.
Recommendations to Congress
The report includes five recommendations for Congress from the CFPB:
- Consider requiring lenders to better coordinate with institutions before originating PSLs.
- Determine whether changes are needed to the treatment of PSLs in bankruptcy proceedings.
- Consider modernizing and clarifying the definition of a PSL under TILA.
- Provide mechanisms for borrowers to understand a complete picture of their student loans.
- Determine whether additional data are needed to enhance consumer decision making and lender underwriting.
The report also offers four separate, but similar, recommendations for Congress, as proposed by the Department of Education:
- Require institutions and private education lenders to work proactively to protect and inform PSL borrowers.
- Work with the CFPB and ED to determine how to afford greater flexibility and relief to PSL borrowers who experience financial distress, including potential changes to the treatment of PSLs in bankruptcy proceedings.
- Amend the definition of private education loan to exclude other Federal education loans.
- Work with the CFPB and ED to identify resources necessary to provide a comprehensive picture of student borrowing (including both Federal and PSLs).
On July 24, the Subcommittee on Financial Institutions and Consumer Protection of the Senate Banking, Housing, and Urban Affairs Committee held a hearing to review parts of the CFPB report. In his testimony, Rohit Chopra, student loan ombudsman for the CFPB, echoed the report’s findings that PSLs carry more risk than federal student loans.
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