When you get into trouble with a government student loan, there are nothing but options -- deferral, forbearance and flexible repayment plans that allow you to pay what you can afford. But with private student loans, those made by individual lenders rather than the federal government, affordable options are so limited that graduates say they're virtually forced into default.
The Consumer Financial Protection Bureau's just-released report on student lending analyzed 5,300 borrower complaints received over the past year and found that the most common complaint was that private lenders are not doing enough to help cash-strapped borrowers work out viable repayment plans.
"Struggling private student loan borrowers are finding themselves out of luck and out of options," said CFPB director Richard Cordray in a public statement. "We are hearing from consumers that they are driven into default because private student loan companies are not providing concrete loan modification options."
The Consumer Bankers Association, which represents private student lenders, countered that the default rate on private loans is far lower than on federally-guaranteed student loans and that complaints against private lenders are rare. Nonetheless, the group said it is working with regulators to develop loan modification programs that will be more flexible for graduates who are in the early stages of their careers, when affordability is the biggest option.
"While the vast majority of private loans demonstrate ongoing successful repayment, CBA's members remain committed to providing robust options to the very small subset of private loan customers experiencing sustained financial distress," said the group's General Counsel Steve Zeisel in a statement. "Some of CBA's members already have launched loan modification programs, while others are piloting programs in advance of a broader roll-out."
The issue is of great interest to both students and lenders because a 2005 revision of the bankruptcy code made it virtually impossible to discharge student loans through bankruptcy. For borrowers, that means a defaulted loan can follow them for a lifetime, growing each year with late-payment, default and collection fees, in addition to interest. The CFPB said in its report that this bankruptcy law gives lenders such an advantage that it may make them reluctant to negotiate with distressed borrowers. The agency has stated that Congress should consider changing the law and reiterates that request in its latest report. Roughly 1.2 trillion in student debt remains outstanding and 7 million student borrowers are in default.
Notably, when graduates have trouble repaying a federal student loan, federal law gives them numerous options. For instance, the law entitles them to extended loan terms, repayment plans that start with a small payment and increase over time and those that figure the borrower's payment as a percentage of his or her discretionary income. These same options are not available for private student loan borrowers. Instead, consumers complain that private student lenders and servicers tell them that they are not eligible for any affordable repayment plan that would allow them to avoid default.
In other instances, borrowers are allowed to "enroll" in temporary forbearance plans, for a fee. But the forbearance options are often short-lived and expensive, simply delaying the moment of default rather than avoiding it.
"Unfortunately the problems highlighted by the CFPB are very common among borrowers that we work with, who generally want to repay their loans but are not given realistic options in times of hardship," said National Consumer Law Center attorney Persis Yu. "The problems the CFPB highlighted are not new and demonstrate why it is critical to restore bankruptcy rights for all student loan borrowers and to improve loan origination, servicing and loss mitigation for all future borrowers."
Meanwhile, the CFPB offered new tools - including a form letter to send to lenders - that gives students a formula for asking for more affordable repayment terms, as well as a worksheet to figure the amount they should be able to afford. The agency also offers an interactive web site aimed at providing student borrowers with their range of options and step-by-step directions to implement them.