A troubling new report from the Consumer Financial Protection Bureau (CFPB) suggests that many of the problems in the subprime mortgage market that precipitated the housing crisis may be occurring with private student loans as well.
The Bureau saw an increase in complaints about private student loans this year. Altogether, there were 5,300 private student loan complaints, up 38 percent from last year. Despite receiving thousands of complaints, the CFPB was able to identify common threads in the experiences of the student loan borrowers. Many of the borrowers who reached out to CFPB noted their struggle with repaying their private student loans. Other common complaints included a lack of flexibility and options regarding repayments when a borrower is unable to repay a loan. The actual ability to get loans only amounted to two percent of the reported complaints.
Private student loans and federal student loans differ in several ways. For example, federal student loans always have fixed interest rates, while private student loans’ interest rates can vary—potentially becoming much more expensive than federal loans. Additionally, federal law offers a variety of repayment plan options to federal loan borrowers, but private loan borrowers often have few or no options when they are struggling to repay their loans. Why would a student choose a private loan, when a federal loan seems like the more serviceable and practical option? For one reason, there are limits on how much a student can take out in federal loans each year; private student loans can help make up the difference. For example, if Student A is going to a university that costs $15,000 per year, he or she can take out only $5,500 in federal loans during his or her first year, if he or she is a dependent. However, this student can take out private loans to pay the rest of the tuition in addition to other student fees and living expenses. The job market has not been welcoming for recent graduates, leaving them to deal with unemployment and underemployment. As the CFPB report finds, the problems often begin during the repayment period.
The report noted that borrowers often found themselves backed into a corner when they found themselves unable to repay their loans: there were no clear paths to avoid default, reaching out to lenders proved unsuccessful, and there were very few options besides forbearance, which can add interest to the loan amount.
The situation is even worse for for-profit college students, many of whom are driven to borrowing private student loans. A March 2014 presentation by Woodstock Institute at the 2014 National Community Reinvestment Coalition conference reflects how precarious this situation is. The report found that for-profit colleges cost more for lower-income students and that for-profit college students are in greater debt overall. The graduation rates for students at for-profit colleges were also much lower than for students at other colleges and universities. This combination of large debts, some of which comes from private student loans, and low graduation rates translates to a financial disaster for these for-profit college students. Woodstock Institute has advocated for stronger regulations and enforcement regarding private student loans and for-profit colleges. Recently CFPB announced a lawsuit against one of the for-profit colleges, Corinthian Colleges, for a predatory lending scheme.