A new federal study recommends changes in consumer protection and bankruptcy law to provide relief for Americans saddled with a share of the country’s $1 trillion in student loan debt, largely blaming private lenders for the problem.
“Too many student loan borrowers are struggling to pay off private student loans that they did not understand and cannot afford,” said Consumer Financial Protection Bureau (CFPB) Director Richard Cordray in a statement. “Moving forward, we must do our best to leave the next generation in a better place than we are today, rather than buried under a mountain of debt.”
The study, released July 20, fulfills a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act that the CFPB and the Department of Education submit a report to Congress on private student loans. According to the joint report, outstanding student loan debt in the U.S. topped $1 trillion in 2011. The report found that approximately $150 billion of that amount is private student loan debt.
The report explained that, before the 2008 financial crisis, private lenders engaged in “subprime-style lending” with less regard for borrowers’ creditworthiness than required for federal loans. The report also explained that federal loans are typically the better option for the borrower because private student loans generally lack the same consumer protections offered by federal loans. Those with federal loans have more flexible repayment options and protections when a borrower defaults, dies or becomes disabled.
According to the study, there are now over $8.1 billion in defaulted private loans, leaving borrowers trapped by the 2005 amendments to the Bankruptcy Code which made it tougher to discharge such debt.
The study recommends clarifying the definition of “private student loan” under the federal Truth in Lending Act “to enhance consumer clarity and ensure a competitive, level playing field.” The study also suggested the imposition of stricter disclosure requirements on private lenders regarding the borrower’s rights and obligations, including disclosure on the availability of federal student aid.
“Requiring private education lenders to make these disclosures before the loan is issued will ensure that a borrower is aware of and receives information about federal student aid and will reinforce the notion that maximizing federal student loans and other aid before borrowing a private education loan is more beneficial to the borrower,” the study said.
Without offering specific recommendations, the study also urged Congress to reexamine the dischargeability of student loan debt under the Bankruptcy Code.
“If Congress concludes that the 2005 changes did not meet their overall policy goals, it would be prudent to consider modifying the Code in light of the impact on young borrowers in challenging labor market conditions,” the study said.