Though federal student loan debt surpasses private student loan debt by a ratio of almost 6 to 1, and lacks the natural investment oversight that private loans posses, the Department of Education and Consumer Financial Protection Bureau are running full steam ahead with a plan to enact immediate reforms upon private student loaning.
On Friday, July 20, the Consumer Financial Protection Bureau (CFPB), in conjunction with the Federal Department of Education, introduced a new online tool to help student loan borrowers that are in, or at risk of default. This announcement comes on the heels of a report released by the CFPB on the state of private student loans containing recommendations for changing private loaning in order to combat rising student debt.
When nearly 80 percent of debt and loose borrowing comes from federal loans, it is curious that the Department of Education would propose to reform private and not federal loans.
By the CFPB’s own estimates, outstanding student loan debt “topped $1 trillion in 2011 — $864 billion of federal student debt and approximately $150 billion of private student loan debt.”
Among the changes recommended in the report, the CFPB would require school certification of private student loans, and more education to borrowers about their financing options with federal loans for higher education. They also want Congress to consider whether or not to allow private student loans to be discharged in bankruptcy proceedings; this presents a huge moral hazard risk to lenders because college graduates have no assets and in the case of bankruptcy, lenders would be left without any return on their investment and no incentive to make loans for higher education.
Additionally, increasing evidence shows that wide availability of federal student loans—not private loans—actually contributes to increasing tuition costs. Even as federal subsidy programs for students, such as Pell grants, have increased 475 percent since 1982, the cost of attending college has increased 439 percent—faster than the rate of health care increases, the Heritage Foundation reports.
The CFPB says “private student loans were originally designed to supplement federal student loans,” but the very nature of a private student loan is the same as any other private loan.
As economist Henry Hazlitt illustrated in Economics in One Lesson, “…there is a decisive difference between the loans supplied by private lenders and the loans supplied by a government agency. Each private lender risks his own funds… When people risk their own funds they are usually careful in their investigations to determine the adequacy of the [investment]. If the government operated by the same strict standards, there would be no good argument for its entering the field at all.”
Federal agencies provide loans, betting taxpayers money, to the very people who are too risky for private investors or banks to invest their own money. The federal student loan program does not have that natural check that exists in the private sector, yet the CFPB and Department of Education want to curb the use of private student loans.
But the CFPB has more problems than just their policy focus: The very structure of CFPB prevents it from being an unbiased and effective protector of consumer rights and activity.
In addition to the fact that the CFPB lacks significant checks on its power, and its structure cuts itself off from any review by any branch of government, the CFPB essentially enforces consumer protection on a case-by-case basis, opening up the CFPB power to arbitrary enforcement, abuse, and lobbying by interest groups. In typical anti-business government fashion, the CFPB Director— currently Richard Cordray, formally a prominent Democratic politician in Ohio—works on an arbitrary definition of what constitutes as abusive lending practices.
The CFPB and Department of Education seek to drastically overturn the current system of private student loans in favor of encouraging students to take on federal student loans—a practice which has proven extremely harmful to college tuition rates and the financial integrity of young people and this country.
Further federal interference in the student loan market will only exacerbate our financial worries, yet the CFPB and Department of Education are running recklessly ahead.
