Private student loan report: Is subprime mortgage crisis comparison fair?
A new government report says the private student loan market suffers from risky terms and lax underwriting, paralleling the subprime mortgage debacle. Private lenders say the criticism is out of date.
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Some students with federal loans do have the option to defer payments or lower them if they are unemployed or have low incomes. But neither federal nor private education loans can be discharged in bankruptcy, Delisle says.Skip to next paragraph
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One recommendation of the report is for lawmakers to consider how borrowers might be able to restructure their debt through the bankruptcy process.
The report acknowledges that many of the trends and problems it describes have changed since the financial crisis hit in the wider economy. Lending standards have changed, for instance, so that lenders can’t as easily sell off the loans they make to students.
In 2011, 90 percent of private student loans had a creditworthy co-signer, up from 67 percent in 2008.
More than 90 percent of private loans are now reviewed by a school financial aid office to make sure that the aid matches the need. In 2008, just under 30 percent of the undergraduate loans were school certified.
One of the biggest sources of confusion for borrowers was that many lenders used to offer both federal and private loans. That ended in July 2010 when all new federal loans began being issued solely by the federal government.
“The Obama administration deserves a lot of credit [for that change]…. That’s already solved a big part of the problem,” Delisle says.
Given current practices and regulations, private lenders “are quite concerned by the unfair implications … that this segment of the consumer lending market ‘operates in the shadows,’” wrote Tom Deutsch, executive director of the New York-based American Securitization Forum (ASF), in a letter to the CFPB in January. ASF members include, among others, groups that issue, service, and invest in private student loans.
To help student borrowers and their families, the Education Department and CFPB announced Friday a new online tool called the Student Loan Debt Collection Assistant.
For borrowers who are not yet in default, it can help them find alternative payment plans and avoid burdensome fees. For those already in default on federal student loans, it shows how to access special repayment options. And for those with private loans, it offers tips on how to negotiate with debt collectors.
“We still have some work to do to ensure that students who take out private student loans have the same kinds of protections offered by federal loans,” said Education Secretary Arne Duncan in a statement Friday. “In the meantime, if you have to take out a loan to pay for college, federal student aid should be your first option.”