Fixing 15% of the Student Loan Debt Problem

Getting a college education is part of the American dream. Unfortunately, the debt students incur from this pursuit can become a nightmare. To help address growing student debt burdens, the Consumer Financial Protection Bureau (CFPB) is asking for information from lenders, consumers, and others to develop a plan to reshape the private student loan market. In particular, the CFPB requests information on the scope of borrower hardships; the current options for borrowers with hardships; the servicing infrastructure; consumer reporting and credit scoring; lender participation; borrower access; and the spillover relationship between student loans and other consumer activities, including obtaining a home mortgage or a car loan. The CFPB hopes to create incentives for creditors and secondary note holders to modify student loans. Right now, creditors may be leery of refinancing private student loans because they are not secured by collateral and have lower outstanding balances than other types of debt, such as mortgages. Moreover, the Bureau hopes to extend the federal student loan income-based repayment plan to private borrowers. Finally, the CFPB wants to provide options to defaulted private borrowers so they may rehabilitate their loans. In addition to the CFPB actions, some members of Congress are trying to fix the private student loan problem by proposing changes to bankruptcy laws through the Fairness for Struggling Students Act. Co-sponsored by Senators Dick Durbin (D-IL), Sheldon Whitehouse (D-RI), and Jack Reed (D-RI), the bill seeks to remove the 2005 change in bankruptcy laws that made it nearly impossible to discharge private student loan debt. The CFPB and Sallie Mae, one of the major private student loan lenders, support the move to reform bankruptcy law. Research from the CFPB shows that student debt can have significant, negative economic results. More than 38 million student loan borrowers owe over $1.1 trillion in outstanding student loans. The federal government finances most of these loans, and the remainder are privately secured. At the end of 2011, students defaulted on over $8 billion in private loans, and many more are likely delinquent. This debt can weigh down students, possibly preventing them from getting a foothold in the middle class. Furthermore, graduates with overwhelming debt may wait longer to enter the consumer finance marketplace. Rohit Chopra, the CFPB Student Loan Ombudsman, stated that “heavy debt from student loans has a domino effect on the economy.” CFPB is accepting comments until April 8, 2013