Report: Many with private student loans fall into default for lack of good options for terms



We also have more stories about:
(click the phrases to see a list)

Organizations:

Subjects:

 


WASHINGTON — Millions of Americans still struggle with high-cost private student loans, with many tumbling into default because the companies servicing the loans aren't offering reasonable options for improved terms, a new report says.

Distressed borrowers are receiving scant information or help when they run into trouble with their private student loans, and affordable repayment options aren't available, the report released Thursday by the Consumer Financial Protection Bureau says.

The latest annual report on the subject by the agency's ombudsman for student loans showed regulators making little progress since last year in nudging companies to offer borrowers more reasonable terms.

And complaints by borrowers are on the rise. The agency reported it received about 5,300 complaints about private student loans between Oct. 1, 2013 and Sept. 30, 2014. That's up 38 percent from around 3,800 complaints the previous year. Most of the complaints involve a lack of repayment options or flexibility in times of financial distress.

Some private-loan borrowers are instead offered temporary forbearance, a short period in which payments aren't due — seen as a temporary fix that may only delay default. Forbearance often comes with required special fees.

"Too many borrowers are barely treading water," said the ombudsman, Rohit Chopra. He told reporters in a conference call that many borrowers with private student loans "are still on the hook and still struggling."

The Consumer Bankers Association, which represents large U.S. banks and regional banks, said in a statement that its members "remain committed to providing robust options to the very small subset of private-loan customers experiencing sustained financial distress."

Private student loans carry higher interest rates than government-backed federal student loans and the options for refinancing them are more limited. The riskier private loans ballooned from around $5 billion in 2001 to more than $20 billion in 2008, then shrank after the financial crisis to about $6 billion in 2011.

Their growth was fueled before the crisis by investors' appetite for securities tied to private student loans, similar to the way they snapped up billions in securities backed by high-rate subprime mortgages. The activity waned after the financial meltdown in 2008. But recently securities linked to private student loans have made a comeback as investors have sought riskier, higher-yielding investments at a time of record low interest rates.

Around 7 million Americans are in default on an estimated $100 billion in student debt, both federally guaranteed and private. Total student debt outstanding topped $1.1 trillion in the second quarter of this year, up from $700 billion in the same period of 2009, according to the Federal Reserve.

Many borrowers still owe money on private loans taken out before the crisis, the CFPB says.

Chopra said that in some cases, employees at call centers operated by companies servicing the loans are evaluated on how quickly they can get borrowers off the phone.

He said the CFPB has launched a program to supervise the operations of servicing companies, having expanded its oversight to nonbank companies such as Sallie Mae that manage large volumes of student loans on behalf of banks. Most student loans are serviced by nonbank companies.

In May, Sallie Mae reached a $60 million settlement with the Justice Department to resolve allegations that it charged members of the military excessive interest rates on their student loans and improperly sought default judgments against them. In addition, Sallie Mae agreed to pay $30 million in restitution and $6.6 million in civil penalties in a settlement with the Federal Deposit Insurance Corp. over claims that the company maximized consumer late-fee charges.

Sallie Mae, formally known as SLM Corp., spun off its loan servicing operation in April into a separate entity known as Navient Corp.


The CFPB issued a sample letter for borrowers to request repayment options: http://files.consumerfinance.gov/f/201410_cfpb_students_sample-letter.doc

All content copyright ©2014 Daily Reporter, a division of Home News Enterprises unless otherwise noted.
All rights reserved. Click here to read our privacy policy.
Daily Reporter • 22 W. New Road • Greenfield, IN 46140 • (317) 462-5528