How we can make private student loans more affordable

Concern is growing among advocates, regulators, and the media about the increasingly enormous level of student loan debt in the United States. Outstanding student debt grew to over $1 trillion dollars in 2013, with private loans making up roughly $150 billion of that amount. Compared to federal student loans, private student loans are often more expensive, are more commonly marketed with questionable practices, and have fewer options for making payments more affordable if a borrower falls on hard times. There are at least 850,000 individual private student loans in default, totaling roughly $150 million.

The Consumer Financial Protection Bureau (CFPB) recently asked the public for ideas on how to promote loan affordability for private student loan borrowers, especially in periods of hardship. Woodstock Institute submitted a comment letter synthesizing some of the lessons learned from efforts to promote affordability for struggling mortgage borrowers, such as the Home Affordable Modification Program and settlements with loan servicers. You can read the letter here.

 

If you’ve followed our coverage of HAMP, you know that HAMP provided much guidance of how not to design a loan modification program. Based on this experience, we told the CFPB that any loan modification or refinance program must ensure that loan modifications are sustainable and affordable in the long term; that effective oversight, enforcement, and transparency mechanisms are in place; that the program can meet the scale of the problem; and that servicing standards are in place to ensure that servicers properly administer the program and communicate with borrowers. We noted that there is currently scant public information about the structure, incentives, and current loss mitigation practices of private student loan servicers and recommended that the CFPB collect and publicize this information.

 

Although there are many differences between student loans and mortgages, the consequences of unsustainable debt loads are similarly devastating. We hope that the CFPB takes the lessons of the not-so-distant past to heart and designs an effective affordability program for private student loan borrowers who desperately need help.