Written by Michael Coleman, Regulatory Compliance Counsel
On Monday we blogged about a report on private student loans released by the CFPB's Student Loan Ombudsman. Today we would like to take a closer look at some of the details of the report. The report indicates that the current outstanding student loan debt is now over $1 trillion, with private student loans accounting for more than $150 billion (15% of the debt). Furthermore, there are at least $8 billion of private student loans in default, representing more than 850,000 individual loans. Student loans have now surpassed credit cards as the largest source of unsecured consumer debt.
The report highlights and summarizes the information and complaints received by the CFPB concerning the student loan marketplace. The CFPB received approximately 2,900 complaints and other submissions from consumers concerning private student loans, the vast majority of which (95%) were about loan servicing. The report summarized some of the issues borrowers identified in their complaints:
"Inability to speak with personnel empowered to negotiate a repayment plan. By far, the most common concern communicated by borrowers has been the difficulty negotiating a repayment plan with their servicer in periods of unemployment, underemployment, or financial hardship. Many borrowers report frustration that they are unable to identify appropriate personnel that can make a determination about their repayment options.
Inability to refinance. Many student loan borrowers have a limited credit history when applying for a private student loan— and their interest rate reflects a high level of risk. But as borrowers build a credit profile, graduate, and earn income, they are often unable to refinance existing student debt at a lower rate— in stark contrast to the market for mortgage refinance products. We have heard from borrowers who say they are looking for loans with more attractive terms, but many have been unable to take advantage of today’s historically low rates.
Inability to access repayment plans previously advertised. Many private student loan borrowers are able to enroll in alternative repayment arrangements included in the terms and conditions of their loans. However, some borrowers note that enrolling in a new repayment arrangement is a difficult process. Some servicing personnel may not be fully aware of all policies or incentive plans available to private student loan borrowers. "
The report also featured a discussion from the CFPB Student Loan Ombudsman on the issues identified in the complaints. One point raised was that the complaints received concerning student loan servicing bore a striking similarity to the complaints received concerning mortgage loan servicing. Another focused on the difficulty that borrowers face in modifying or refinancing student loans, and that the CFPB would welcome "creative efforts by lenders to help borrowers restructure their debt prior to or after default."
In the discussion the CFPB Student Loan Ombudsman had this to say about credit unions' participation in the private student loan market:
"Community Banks and Credit Unions
A number of leaders from small financial institutions have expressed interest in developing longterm relationships with young customers but note that many of them are unable to enter the mortgage market due to their student loans. One way that small financial institutions might assist younger customers to get closer to homeownership is to offer products that allow them to refinance any student loans they might have with rates in excess of their perceived repayment risk. Small financial institutions might even be able to assist customers worried about falling behind on student loans by offering products that might allow them to be successful.
The CFPB received very few complaints from borrowers with private student loans from small financial institutions. Increased participation by small financial institutions might benefit the market." (emphasis added)
The report notes that 87% of the complaints were directed at just 7 companies (take a look at Table 2 on page 5 of the report), which is not surprising considering the concentration of the market. However, as the report indicates, the CFPB received very few complaints from borrowers with private student loans at credit unions, and that increased participation by credit unions in the private student loan market might be beneficial.