Why CFPB's Plan to Help Students May Have Narrow Impact

WASHINGTON — The Consumer Financial Protection Bureau's attempt to help struggling student borrowers may be limited in what it can accomplish.

The agency sought comments Thursday on how to assist student borrowers amid fears that the $1.1 trillion in outstanding student loan debt could prove to be the next financial crisis. Regulators and analysts have warned that many borrowers have minimal access to refinancing options.

The problem, observers said, is that at least 85% of that outstanding debt is in federal loans — an area over which the CFPB does not have supervisory authority. Private lenders who service federal loans are often limited in how they can modify such loans.

"If we're just talking about private loans, that's not going to save the market," said Michael Tarkan, an analyst at Compass Point Research & Trading. "The majority of the default problems with this country and student debt is primarily on the federal side and after that; it would be the legacy loans" underwritten before 2009.

The CFPB is asking for comments on several issues, including the impact of student debt on the economy, how it hinders access to mortgage and car loans, how distressed borrowers manage their debt obligations, and other alternative payment options that could be applied to the market.

The agency is hoping to present recommendations to Congress on how to tackle the issue, saying it will be good for the overall market.

This inquiry "is in the interest of both lenders and borrowers if they're able to find repayment plans that allow the borrower to make good on their debt without experiencing significant distress," Rohit Chopra, student loan ombudsman for the CFPB, said in an interview.

Although the bureau can only target private student loans, agency officials say the agency's plan could still have a significant impact.

Chopra noted that federal student loan borrowers often have access to alternative payment options — including extended repayment plans and graduated repayment plans in which monthly payments can be temporarily lowered. Some, but not all, private lenders offer similar plans, he said.

"Last year, the bureau found that unlike distressed federal loan borrowers, private student loan borrowers generally did not have alternative options such as long-term forbearance, income-based repayment or rehabilitation in cases of default," Chopra said. "And there are other types of temporary payment programs that could be used in this market, like interest-only payments or other types that address short-term or medium-term hardships."

Indeed, for private student loans, the modification options offered by lenders appear to be a mixed bag. Dominant players such as Sallie Mae, the largest private student lender, often offer a 12-month rate reduction program for struggling borrowers.

"For our customers who demonstrate a reduced ability to pay, we offer customized assistance — modified loan terms, lower interest rates, and good-faith catch-up payment programs that amortize the loan principal, as well as the ability to temporarily suspend payments — that we believe is consistent with the CFPB's vision," said Sallie Mae spokeswoman Patricia Christel.

Last year, 90% of Sallie's loans in repayment were making payments on time and their charge-off rate was 3.4%. This compares to the most recent federal student loan two-year cohort default rate of 9.1% in fiscal 2010.

But Chopra said refinancing plans are not universal at private student lenders.

"Many private lenders have offered these programs, but many do not," Chopra said. "We saw where borrowers were having a tough time negotiating affordable repayments and many experienced issues with the way the payments were structured."

But there are also restrictions on what alternatives lenders can offer on federally insured loans that may be serviced by a private lender.

"People get confused because when they call a lender like Sallie Mae and the company won't modify the loan," said Mike Cagney, CEO of Social Finance, a nonbank startup seeking to finance prime student loan borrowers. "Nine times out of 10, it's a federal loan and they don't have the flexibility to do a modification. The reality is they're hamstrung because they're servicing a federal loan portfolio."

The CFPB has shown a keen interest in the student loan marketplace, flagging its potential to cause systemic problems.

Last July, CFPB Director Richard Cordray and Secretary of Education Arne Duncan released a study to Congress that found more than $8 billion in defaulted private student loan balances and even more were in delinquency.

"Federal student loans remain the best option for borrowers, but we know some students have turned to private student loans and are struggling to repay," Duncan said in an emailed response to the CFPB's public inquiry. "We're glad to see the CFPB is taking steps to help create options for those who are having trouble managing their private student loan debt."

The public inquiry, which lasts until April 8, poses a wide range of questions for consumers, lenders and associations. But Chopra cautioned that it does not necessarily signal the creation of a new, uniform modification program for all lenders.

"There may be other impediments to offering repayment flexibility which may include certain accounting guidelines or operational bottlenecks and we want to hear those," he said. "This is literally an information request. We want to hear all options."