Student debt burdens get government's notice

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(MoneyWatch) A new report from the Consumer Financial Protection Bureau lays out in harsh terms the hardships that private student loan borrowers face in repaying their loans, from high interest rates to inflexible terms set by private lenders. But the agency stopped short of advocating debt relief or any other concrete measures to address the problem. 

"We are concerned that unmanageable student loan debt may be harmful to recovering consumer markets and may be dragging down borrowers' lives," CFPB director Richard Cordray said in releasing the study.  "We learned a hard lesson in the wake of the mortgage meltdown. We cannot just sit by and watch this happen to people again."

 This year's report analyzed more than 28,000 comments that the bureau received after soliciting suggestions for solving the private student debt crisis earlier this year.  The respondents noted that the repayment inflexibility of private student loans has damaged the credit of borrowers, hurt their chances for buying a home and a car and have jeopardized their future retirement and career opportunities.

The report focused on private college loans that often have a simple application process but that don't offer the consumer protections of federal student loans. According to the report, the majority of borrowers who took on debt of $40,000 or more have private college debt.  Private loans represent about 15 percent of the $1 trillion in outstanding college debt.

"The unfortunate reality is that many private loans do not have the same affordable payment options as federal loans," Cordray said. "Many private student loan borrowers have run out of options and are struggling to make ends meet. Student debt has become the defining feature of their lives -- the millstone around their necks that holds them back from a full financial future."

One aim of the study is to keep attention trained on this problem. The report suggested that the financial problems of young Americans struggling with education debt is not confined just to the borrowers, but to society as a whole. 

Student debt impact on housing market

The report noted, for instance, that the National Association of Home Builders stated that higher debt burdens "impair the ability of recent college graduates to qualify for a loan." The National Association of Realtors said that the first-time homebuyers' market share of existing homes in February was 30 percent compared to the historical level of 40 percent.

Last year the agency compared private student loans to subprime mortgages.

Student debt has also forced more young Americans to live with their parents. Census data detected a sharp rise in the trend: In 2007, 4.7 million Americans between the ages of 25 and 34 were living with their parents compared with nearly 6 million four years later.

Private loans need to be more flexible

Many private student loan borrowers, who responded to the CFPB, made clear that they wanted alternative repayment plans to reduce the burden. In 2008, 10 percent of borrowers devoted more than 25 percent of their income to repay their loans, which the federal government expects has risen since the recession.

Currently, it is very difficult to refinance private student loans which can carry high interest rates. Unlike federal student loans, interest rates are variable and are based on the creditworthiness of borrowers. The loan restructuring  for most of the market, the report observed, is "troublingly low." 

The dearth of refinancing  is particularly frustrating because lenders set high interest rates justified by the knowledge that many students won't graduate or find a good job upon graduation. But when students do graduate and obtain jobs, and their risk of default drops significantly, the interest rates don't.  

Cordray noted that many respondents suggested the government should weigh some form of debt forgiveness.

"Some in the industry contend that policymakers should create a way for borrowers to repair their credit and get out of default -- what might be called a "credit clean slate," he said. "Something similar already exists for borrowers with federal student loans -- a program that can limit some of the negative credit effects of default. With the option of a clean slate, consumers may be able to qualify for a mortgage or an auto loan that otherwise would have been denied, which could open up new paths forward for them to get a firmer foothold to climb the economic ladder.

But there is little that the CFPB, created in the face of much opposition as part of the Dodd-Frank reforms, can do without help from Congress, which would have to approve any new regulations. The Republican-led U.S. House of Representatives, however, remains actively hostile to the CFPB.

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