Prepared Remarks by Richard Cordray
Director of the Consumer Financial Protection Bureau
Private Student Loan Report Press Call
July 19, 2012
These days, the prospect of saving and paying for education can be daunting. Even if you save from the day your child is born, it may not be enough by the time he or she reaches college age. And then the only option may be to borrow the money. Today, Americans owe more than $150 billion in private student loan debt – and many borrowers are struggling to pay it back.
The Consumer Financial Protection Bureau and the U.S. Department of Education just completed a study on private student loans that we are releasing today. We heard from many students who took on private student loans with features quite different from federal student loans offered by the Department of Education. Our findings reveal that students were yet another group of consumers that were hurt by the boom and bust of the financial crisis. Too many student loan borrowers were given loans they could not afford and sometimes for more money than they needed. They are now overwhelmed by debt and regret the decisions they made.
There are striking similarities between stories of the private student loan market and stories of mortgage market in the years leading up to the financial crisis. Before the financial crisis, some lenders in both markets engaged in aggressive marketing and risky underwriting. They also originated loans for immediate sale.
Not all lenders chose this path, but enough did to produce a market-wide trend. This aggressive lending and subsequent challenges that new graduates have faced in the labor market have led to an uptick in private student loan debt and defaults. Cumulative private loan defaults are currently over $8.1 billion.
After the financial markets crashed, some common-sense practices returned. Without investors willing to buy risky loans, lenders were forced to care more about a borrower’s ability to repay. Now, most lenders make sure that students are not borrowing more than they really need when issuing a private student loan. Lenders are working with schools more closely and asking borrowers to find co-signers. While these are more prudent trends, borrowers who took out loans at the height of the boom are still suffering from those excesses.
At the Bureau, we aim to ground our work in the best available data and in actual consumer experience. In preparing this report, we obtained extensive data from some of the largest private student lenders, covering some five million loans. We also received nearly 2,000 comments from individual borrowers about their experiences with private student loans.
For many of these people, the decision about how to pay for college was their first major financial decision, and they may not have understood the significant differences between private and federal student loans. Without clear guidance or a good way to compare the pros and cons of different loan options, many students got in over their heads in debt. The unfortunate reality is that private loans do not have the same protections for troubled borrowers as federal loans, which are especially important in a tough economy.
Stuck with a loan they do not fully understand and perhaps are not able to repay, some borrowers feel trapped. On top of that, if private student loan borrowers are underemployed after graduation or are later faced with a life crisis or a change in financial circumstances, it is very hard to file for bankruptcy and have their loans discharged. In 2005, the law was changed. Private student loans are no longer treated like other consumer debt, making them nearly impossible to discharge.
Without the ability to discharge their loans, borrowers have looked for other ways to handle their debt. But many borrowers told us their lenders were unable or unwilling to modify or adjust repayment terms even in these tough times. And the borrowers feel they have little leverage to negotiate reduced loan payments with their lenders.
Today, U.S. Secretary of Education Arne Duncan and I are each submitting to Congress our individual recommendations for some common-sense reforms to ensure that we do not repeat the risky underwriting practices of the past. Each of us wants to ensure that lenders and school financial aid counselors are working together in everyone’s best interest.
Borrowers should have the information they need to have a full picture of their debt obligations, and lenders need to maintain prudent underwriting standards. Each of us also wants Congress to take a second look at how borrowers might be able to restructure their debt in the bankruptcy process.
All of us who are parents, teachers, or citizens, as well as our young people themselves, know that 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. As the Consumer Financial Protection Bureau turns a year old this weekend, we recognize that our work to help students and consumers has just begun.