The Consumer Financial Protection Bureau is promising action to help private student loan borrowers swimming in high levels of debt.
The Dodd-Frank Wall Street Reform and Consumer Protection Act established a student loan ombudsman within the Consumer Financial Protection Bureau a few years back. The ombudsman is charged with preparing an annual report complete with recommendations for the Secretary of the Treasury, the Director of the Consumer Financial Protection Bureau, the Secretary of Education, and Congress.
The third such report was released this month and the ombudsman, Rohit Chopra, found quite a few areas within the private student loan market that he said needed improvement.
The new report was based on more than 5,300 private student loan complaints and more than 2,700 debt collection complaints related to student loan debt submitted between Oct. 1, 2013, and Sept. 30, 2014.
Of these complaints, 57 percent of them were related to repaying the loans and dealing with the lenders. Another 41 percent were from people unable to repay their loans and the final 2 percent came from people trying to get a loan.
Chopra found a clear pattern between these complaints that he broke down into four categories.
1. These lenders don’t provide a clear path to avoid default.
2. Even if borrowers are proactive about reaching out to their lenders, these attempts are usually unsuccessful.
3. Any options that do exist are typically offered “too little, too late”
4. Private student loan borrowers face a catch-22 for continuing their education
With student loan debt topping $1.1 trillion and more than 10 percent of that coming from private student loans, Chopra said the CFPB is likely to step in with additional rules or lawsuits against some of the lenders if the industry doesn’t make some changes.
Chopra also recommended in his report that Congress consider fixes to the bankruptcy code to enable greater numbers of distressed borrowers to discharge their student debts. He said that the 2005 change to the bankruptcy laws makes it harder for borrowers to be able to get rid of their obligation to pay their debt, even under bankrupt status.
In turn, he believes, this is making lenders ignore cries for help from borrowers since they know the borrowers don’t have a lot of options.
Another suggestion, one the Obama-connected Center for American Progress has made as well, would be for borrowers to be allowed to discharge their private student debts in those cases where their lender didn’t offer them flexible repayment options.
Under this scenario, Chopra wrote, lenders “would have a stronger, short-term, economic incentive to offer borrowers a greater array of options to avoid default.
