Private Student Loans Boom & Bust: Consumer Financial Protection Bureau Report
I have a generally low opinion of private loans, as they are typically risky and expensive for borrowers. Unfortunately, higher education is so expensive that many of us cannot cover the costs of our dream school while still avoiding private student loans.
The Consumer Financial Protection Bureau (CFPB) today released the most comprehensive study of private student loans we’ve seen, including a large set of quantitative and qualitative data. The study was informed by data provided by lenders in the marketplace, existing data sets maintained by the Department of Education, as well as input from financial institutions, the higher education community, consumer advocates, and individual borrowers.
The data show:
- Americans owe more than $150 billion in private student loan debt.
- Ten percent of recent graduates of four-year colleges have monthly payments for all education loans in excess of 25% of their income.
- In 2009, the unemployment rate for private student loan borrowers who started school in the 2003-2004 academic year was 16%.
- Default rates have spiked significantly since the financial crisis of 2008.
- Cumulative defaults on private student loans exceed $8 billion, and represent over 850,000 distinct loans.
Key findings include:
- In the last decade, private student loan origination rapidly grew and then precipitously declined. That’s because investors were really into asset-back securities for a while, the loans were packaged for sale.
- During the growth period, private student lender underwriting standards loosened. Loans were marketed directly to students, school involvement in the process was reduced, and lenders loaned to borrowers with lower credit scores.
- Since 2008, lenders have changed their underwriting and marketing practices. Now almost everybody has to get a co-signer, schools typically certify the student’s need, and lenders have reduced lending to borrowers without excellent credit.
- Many borrowers did not clearly understand the differences between federal and private student loans (I know I didn’t) and many private student loan borrowers did not exhaust their federal Stafford Loan limits before borrowing private loans.
- Some groups of borrowers used private student loans substantially more than others. In 2008, 42% of undergraduates at for-profit colleges took out a private student loan, while only 14% of all undergraduates used a private student loan.
- Many borrowers are struggling to repay their private student loans. Damn recession.
- Private student lenders are heterogeneous, with some distinct sectors that present varying levels of risk. Traditional financial institutions dominate the private student lending market, but there are also some non-profit state-affiliated lenders, and some schools lend their own funds.
The Consumer Financial Protection Bureau put forth a series of recommendations to Congress:
- enhance the role of schools in the private student loan origination process
- examine the appropriateness of the bankruptcy discharge standard, and
- modernize the regulatory framework to ensure a competitive, level playing field where consumers fully understand their debt obligations and lenders have appropriate data to make underwriting decisions.
The Department of Education also weighed in, calling upon Congress to:
- require institutions of higher education and private education lenders work proactively to protect and inform private student loan borrowers,
- work with the Department of Education and the CFPB to determine how to afford greater flexibility and relief to private student loan borrowers who are experiencing financial distress,
- amend the definition of private education loan to exclude other Federal education loans, and
- work with the Department of Education and the CFPB to identify the necessary resources to provide a comprehensive picture of student borrowing that is inclusive of both federal and private student loans.
-Heather
