Administration Touts Efforts to Ease Student Debt Woes

WASHINGTON — The interim chief of the Consumer Financial Protection Bureau called Wednesday for greater transparency in the student lending market to help spur competition among schools and lenders and create a fair marketplace.

The stakes are particularly high as college tuition costs are rising and students are taking on more debt, and in turn more risk, Date said at a speech in Minneapolis outlining the bureau's student loan disclosure initiative. On Tuesday, the CFPB and Department of Education unveiled a model disclosure form for financial aid packages that schools will use to present aid offers to students.

"For students to assess their future ability to repay, they have to consider their probability of completing the degree and forecast their future earnings — as well as understand the terms of the loan," he said. "Given the substantial investment that families make in higher education, clear information can help ensure that students and families take on the levels of debt that make sense for them."

Date's speech coincided with an announcement from the White House that it plans to cap monthly student loan payments at 10% of a student's discretionary income, using an executive order to move up a change that wasn't scheduled to go into effect until July 2014. It also plans to offer a 0.5% reduction in a student's interest rate if they consolidate their federal loans, and allow them to make only one monthly payments on the loans, beginning in January.

At a speech in Denver, President Barack Obama said the initiatives were part of an ongoing effort to help ease the burden of student debt.

Earlier this year, the president signed the Healthcare and Education Reconciliation Act, which eliminated government subsidies for "big banks" that make guaranteed federal student loans, he noted. "The real outrage was letting banks keep these subsidies while students were working three jobs just to get by," he said, to cheers from the audience of college students.

According to information released by the administration Wednesday, over the past decade tuition and fees at public colleges have increased by an average of 5.6% per year above the rate of general inflation. Seniors who graduated college in the last school year had about $22,000 in debt from a public college, and $28,000 in debt for a private college, according to the College Board.

The bureau has been collecting information from students since July about their experiences with student loan debt.

"Our recent grads enter a job market that has been soured by the worst financial crisis since the Great Depression," Date said. "Signing up for tens of thousands of dollars in student loans — and agreeing to pay a monthly bill that is likely several hundred dollars — is a decision that needs to be made with a clear head and clear information."

On Tuesday, the CFPB and Education Department released a model disclosure form for financial aid awards, similar to the model disclosure forms they unveiled earlier this year as part of the Know Before You Owe project.

The forms include the cost of attending the college, including tuition, fees and other expenses; clear distinctions between scholarships and loans; a list of all the federal loans available to students; the total estimated student loan debt at graduation; and estimated monthly debt payments after graduation.

Date said parents are often so confused by the loan process that they turn to credit card debt to pay college expenses, a much more expensive source of credit. And students can't easily determine how much debt is too much, because financial aid award letters don't estimate what a student's payments might be.

Date said a worrisome trend is the increase in the number of nontraditional, high-priced private loans offered by, or in partnership with, for-profit colleges. Even the schools that make the loans admit that they will likely end up in default, he said.

"We have heard some cases where these loans are made with little evaluation of the student's ability to repay the debt, and without a cosigner to provide a backup source of repayment," he said. "Unlike federal loans, there is often no safety net built into these loan programs, such as loan forbearance or modification rights for those who can't make payments after graduation."