Student Lending Market 'Too Big to Fail': CFPB Official

Total outstanding student loans in the U.S. have grown to the point of having potential far-reaching effects on the financial system, an official from the Consumer Financial Protection Bureau told bankers this past week.

Following his announcement that student-loan debt has topped $1 trillion, Rohit Chopra, the CFPB's student loan ombudsman, said the market was now larger than previous estimates. Chopra said the increasing debt, mostly from federal student loans, could hamper the housing market recovery in the near term, and have long-lasting effects on other bank products. (The bureau's estimates of total student loan debt came from a joint study with the Department of Education.)

"It could cause real headaches …across product lines in your businesses," Chopra said at the Consumer Bankers Association's convention in Austin, Texas. "If these borrowers are so overleveraged that it carries throughout their entire adult life, this is a big problem."

If the cost of higher education continues to grow in excess of inflation or GDP, and wages remain fairly flat, it could mean banks will be originating fewer mortgages and auto loans over the next couple decades and have fewer private wealth clients in 30 years.

"All of the money that people are not able to traditionally save right after college is less money that they would put away in tax-deferred retirement plans, pension plans," he said. "This is something that has real impacts and challenges all of us, and I'm sure it challenges all of you in your institutions."

Under Dodd-Frank, the bureau must issue a joint report to Congress with the Department of Education on the private student loan market by July 21. CFPB has authority over private student loan issuers of any size, and has a designated Office of Students that serves as an ombudsman on private student loan issues.

Among the bureau's early findings, Chopra said, is that students often do not understand the difference between federal and private student loans, or the pros and cons of choosing one over the other. And some bankers complained that there is often a presumption that students should exhaust their federal loan options before considering private loans.

Private loans make up only a small portion of the entire student lending market. Of the $1 trillion in student debt, Chopra said $848 billion of that was in federal student loans - including Stafford, PLUS and Perkins loans - as of Sept. 30.

In addition to a financial aid shopping sheet that allows borrowers to compare student aid offers and private versus federal loans, Chopra said CFPB plans to counsel federal loan borrowers after they graduate but before their first payment is due - when early delinquencies and defaults often occur.

"If they can reduce the amount of money and manage their student loan debt on the federal side, they might be able to manage their private loan debt better," he said.

But Chopra said private lenders also need to help find methods to quickly get struggling borrowers into payment programs and avoid default "rather than them disengaging completely."

Yet some members of the audience said that is easier said than done. They pointed out that some prudential regulators will not let lenders modify a private student loan unless it is 120 days past due.

One banker asked how Chopra thought the regulators could achieve a balance between helping borrowers who need repayment alternatives and the safety and soundness of a lender's portfolio.

Chopra said the CFPB will likely engage with safety and soundness regulators on that question. "It's fair to assume that we will certainly be active participants in any interagency discussion as it relates to private student loans," he said.