CFPB Calls for Payment Reductions on Student Loans

WASHINGTON — The Consumer Financial Protection Bureau is pushing for private student lenders and the government to help lower payments for borrowers after receiving thousands of complaints from consumers.

In a report released Wednesday, the CFPB called private student loans a potential "roadblock" to a borrower's entire financial life which creates a domino effect on the economy.

The agency said student lenders should consider lowering payments for performing and struggling borrowers in addition to clearing credit reports for defaulted customers now on the rebound. The government should encourage student lenders to offer such refinancings, the CFPB said.

"Although there are signs that the housing market is recovering, we cannot forget that all of us were impacted by the meltdown, whether we personally took on a subprime mortgage or not," said Rohit Chopra, the CFPB's point-person on student loans, in a conference call with reporters. "While student debt may not pose that same sort of systemic risk to the financial system, it could be a drag on the recovery if borrowers can't afford their payments and fully participate in the economy."

The CFPB's report calls for private student lenders to offer: "refi relief" to borrowers who pay on time; lower monthly payments for distressed borrowers; and an option to clean a defaulted borrower's credit history once they begin paying a modified loan on time.

Student borrowers often receive a high interest rate on their private loan but the CFPB argues that the risk is lower after the borrower graduates and gets a job. The loan should be refinanced to a lower rate so long as the payments have been made on time, the agency said.

Likewise, the CFPB suggested lenders should lower monthly payments for distressed borrowers commensurate to "a reasonable" debt-to-income ratio.

"Given today's historically low interest rates, there is a tremendous opportunity for lenders to take advantage of an underserved market," said CFPB Director Richard Cordray in prepared remarks at a field hearing in Miami late Wednesday. "Some people noted in their comments that a robust refinance market for private student loans could provide a break for consumers who have better credit than when they first borrowed and now deserve to have a fair shot at qualifying for lower interest rates."

Cordray said the agency is concerned that the "unmanageable student loan debt may be harmful to recovering consumer markets and may be dragging down borrowers' lives."

The CFPB report was released the same day that Sen. Elizabeth Warren, the founder of the agency, introduced a bill that would allow federal student loan borrowers whose interest rates are set to jump July 1 to receive a rate that matches what big banks get through the Federal Reserve discount window.

Both the CFPB and others have warned that the level of student loan debt is unsustainable, and poses a potential systemic threat. The problem, Chopra said, is that many of the proposed solutions to the high cost of higher education focus on fixing the problem going forward, not addressing those already in debt.

"It is very tempting for policymakers to focus solely on future generations of student loan borrowers," he said. "But for borrowers struggling today, that singular focus feels like rearranging deck chairs on the Titanic."

How much impact private student lenders can have on the $1.1 trillion market is unclear.

The Consumer Bankers Association sent a letter to regulators in March stating that private student loans make up only 7% of originations compared to 93% for federal loans. The trade group asked for regulatory relief, largely on accounting for problem loans, so banks could modify struggling borrowers' loans without taking an immediate hit to earnings.

"Lenders believe that if they have more flexibility in working with some student loan borrowers, for example, by modifying the loan terms during a defined time period following graduation (e.g., 3-4 years) to allow for a lesser payment, defaults could be prevented," said Richard Hunt, CBA's president and chief executive, in the letter. "This could help borrowers avoid some of the resulting negative consequences associated with a loan being charged off by a lender, including notations on borrower credit reports that cause problems with the ability to obtain future loans, jobs applications, renting housing, buying a car or a home, and becoming broader participants in the economy."

Chopra acknowledged the difficulty for private lenders to offer significant relief to borrowers because they have to mark down the value of a loan as a troubled debt restructuring before changing its terms.

"It may require a lot of agility by servicers and lenders to maximize the value of these loans," Chopra said.

He noted that net interest margins for student loan assets have not experienced a "dramatic decline" like the margins of other consumer asset classes because there's so little competition to refinance private student loans.

"We've seen some cases of limited activity where credit unions and startups are looking to serve this market," Chopra said. "If there was a way to get it to scale, it could be of great help to many borrowers but also increase the efficiency of the market overall."

The agency's report targets private student lenders but it's derived from more than 28,000 public comments, often including borrowers holding both federal and private student loans.

Many student borrowers have multiple loans because they first exhaust all of their federal borrowings before seeking private loans. While some commenters said they have been able to find relief for federal loans, the overabundance of debt coupled with a weak employment market left them completely underwater.

"We are not looking to walk away from these loans," said one commenter, Rachael Costa, who co-signed on $200,000 in federal and private loans for her two sons and can no longer afford it after unexpected medical issues. "We have tried calling several different lenders to see about payment options or consolidation loans to lower the payments and we were told nothing could be done!"

Like many other commenters, Costa suggested an income-based modification program.

In a statement issued Wednesday, Secretary of Education Arne Duncan said they have provided relief more readily than private lenders.

"We've done a lot to provide federal student loan borrowers with key protections and affordable repayment options so they can successfully repay their loans, and we have made it easier for them to pursue public service careers," Duncan said. "While federal loans remain a student's best option, the CFPB's important work highlights that many students are struggling to repay debt from private lenders, identifies obstacles that hinder lenders from providing borrowers with more options to better manage their debt, and provides thoughtful options for addressing these challenges that deserve policymakers' serious consideration."

Asked whether potential solutions rest more with the public or private sector, Chopra acknowledged that the entire fix does not lie with the private sector.

"There may in fact be some limited operational, accounting, information technology and management bandwidth to do everything" for those lenders who are dealing with large problem credit portfolios outside of student lending, Chopra said.

As for public assistance, "the bureau's role here is to provide this sort of analysis about how the market is structured and what might be some of those levers to either increase the speed of the activity or to have the activity exist at all."