Student Loans

Last week, we published a report on student loan affordability, which discussed the low levels of activity in the student loan refinance market. Since that time, we’ve received a lot of questions from consumers about what to consider if they find a refinance option. We’ve uploaded these questions to Ask CFPB. Take a look.

Should I refinance my private student loan into one with a lower rate?
Private student loans generally feature variable interest rates based on a borrower’s credit history. When borrowers first take out private student loans, many have a limited credit profile and are treated as higher credit risks by lenders. This means that, for many borrowers, private student loan interest rates can be quite high.

Some borrowers who have graduated, obtained a job, and have excellent credit may be able to qualify to refinance their existing private student loans with a new private loan at a lower rate.

Unfortunately for many borrowers in this situation, there aren’t very many financial institutions that offer this financial product, but if you are able to find one, here are some things to consider:

• Look closely at the APR. The monthly payment on your new loan might be lower, but the interest rate could be higher. This can occur because the loan term might be spread out over more years. Active-duty servicemembers should remember that they might also lose rate benefits on pre-service obligations if they refinance.
• Consider the tax consequences. Your new refinanced loan may not be considered a student loan for the purposes of the student loan interest tax deduction. If you regularly claim this deduction, be sure to consider whether the new loan will allow you to continue to do so.

Should I refinance my federal student loan into a private student loan with a lower rate?
It depends. While today’s interest rate environment is at historical lows, federal student loan interest rates set by Congress have not gone down on the most common type of loan, the Unsubsidized Stafford Loan. Some borrowers in repayment with excellent credit may be able to qualify to refinance their existing federal student loans with a new loan at a lower rate. Borrowers considering this option should also be aware of the risks:

• Look closely if you’re switching from a fixed to a variable rate loan. Interest rates for most outstanding federal loans have fixed rates, which means that you never have to worry about your monthly payment going up when interest rates rise in the future. If you switch to a variable rate loan, know that your interest rate could rise higher than the original fixed rate loan over time.
• You’ll probably sign away certain benefits if you refinance. Federal student loans feature a number of options for borrowers that run into trouble, including Income-Based Repayment (IBR). Borrowers working in certain professions—like those employed in public service or as teachers may be eligible for loan forgiveness for certain federal loans. If you refinance a federal loan with a new private student loan, you will no longer be eligible to participate in these federal loan forgiveness programs. There are also loan discharge benefits in the case of death or permanent disability on certain federal student loans. Active-duty servicemembers might also lose benefits on pre-service obligations if they refinance.

If you are considering refinancing your federal student loans with a new private student loan, be sure you understand what you’re giving up before making this choice. In general, honest lenders will warn you about the benefits you are giving up when refinancing out of a federal student loan. If you have a secure job, emergency savings, strong credit, and are unlikely to benefit from forgiveness options, it may be a choice worth considering if you’re looking to lower your payments.

Refinancing your student loan could help you take advantage of your improved credit profile, as well as today’s historically low interest rates. It can be a useful way to lower your monthly payments and build your savings, but be sure to consider the risks and benefits before signing on the dotted line.

This morning, Assistant Director for Students Rohit Chopra wrote an op-ed that appeared in Politico about the impact of student debt on the economy:

While many in Washington are focused on what loans look like for future borrowers, there may be a domino effect on the broader economy if we ignore borrowers currently stuck with high student loan payments.

Since the Consumer Financial Protection Bureau highlighted a year ago that student debt had surpassed the $1 trillion threshold, others have warned about the impact on the broader economy. Last year, the Treasury Department’s Office of Financial Research described how student debt might impact demand for mortgage credit. The Federal Reserve Board’s open market committee discussed whether student debt is impacting household spending. And just a few weeks ago, the Financial Stability Oversight Council discussion of student debt in its annual report added to the chorus.

In February, we asked the public to tell us about potential policy options to tackle the problem of unmanageable student debt — particularly private student loans, a market that boomed in the years leading to the financial crisis. We received more than 28,000 submissions from experts and individuals. We heard that high student debt levels might impact everything from homeownership to health care.

We’ve cross-posted the piece on our site, as well. Read the whole thing.

We also published a report on student loan affordability that highlights these issues in more detail.

Join us for a field hearing in Miami-Dade County, Florida on student loan borrowers starting at 6 p.m. EDT today. Follow along on twitter using #StudentDebt.

Today’s live event has ended.

If you missed the event, you can read Director Cordray’s remarks, watch the recording below, or read our report on student debt and student loan affordability.

Join us for a field hearing in Miami-Dade County, Florida on student loan borrowers. The hearing will take place on Wednesday, May 8 at 6 p.m. EDT.

The event will feature remarks from CFPB Director Richard Cordray, as well as testimony from consumer groups, industry representatives, and members of the public.

The hearing will be held at:

Miami Dade College
Wolfson Campus Chapman Center, Room 3210
300 N.E. 2nd Avenue
Miami, Fl. 33132

This event is open to the public and requires an RSVP.

To RSVP
Email cfpb.events@cfpb.gov with:

• Your full name

• Your organizational affiliation (if any)

See you there!

A few weeks ago, we announced that we’re gathering information to identify policy options for borrowers to find affordable options on their private student loans.

In that short period of time, we’ve received over 20,000 responses from individuals and organizations telling us what could be done. We’ve already posted many of the responses online – take a look.

Here’s a couple of the issues and ideas that have been submitted:

Refinance products and the capital markets: A number of participants, including a publisher of websites on financial aid and a start-up CEO, described how there may be significant demand for credit-worthy borrowers to refinance their loans and lock-in lower rates, but creative lenders face hurdles in the capital markets to fund loans. Individual borrowers have also described how the lack of refinance options impacts them.

Government-sponsored programs to promote affordable loan repayment: Many participants have talked about income-based repayment, and two separate think tanks discussed creating programs and capital vehicles to modify loan terms so borrowers can get affordable payment plans.

Impact on professions: A number of participants talked about how student debt affects their profession. For example, a medical student wrote about the inability to get a lower rate. A physician assistant serving veterans talked about the difficulty staying in public service. A school district official wrote about how the lack of repayment options on private student loans impacts teacher retention. A mortgage loan officer talked about the impact of student loans when qualifying for a mortgage.

This is just a small sample of the input we’ve received – we know there’s even more out there. Submit your ideas and input online by April 8, 2013.

In case you missed it, yesterday Director Cordray announced our proposed rule on student loan servicers.

As so many families are all too aware, the cost of higher education has been steadily rising in recent years. As a result of these rising costs, more consumers need loans in order to afford college. By the end of last year, outstanding student loan debt was more than $1 trillion.

Managing that debt can be complicated for borrowers – especially for those who encounter problems with their loan servicers. Loan servicers are responsible for collecting payments from borrowers on behalf of loan holders. A servicer is often different than the lender itself, and a borrower has no control or choice over which company services a loan. We have heard complaints from private student loan borrowers that nobody holds servicers accountable for answering their questions and providing quality customer service. So students can find themselves at a dead end – stuck without a clear path forward.

The decision to take out student loans may be the first major financial decision for many of these borrowers. We do not want to see their college degrees become more burden than blessing. But many students are saddled with debt and may believe they have few options to make their debt more manageable and affordable. With the challenges they face in the current economic environment, they can be precluded or delayed in pursuing other financial opportunities like getting a mortgage or saving for retirement. Given the rapid growth of this market and the recent rise of delinquency rates, it is important to ensure that borrowers receive appropriate attention from their servicers.

Today we are proposing a rule that would allow the Consumer Bureau to supervise nonbank student loan servicers for compliance with federal consumer financial laws.

Read the rest of Director Cordray’s remarks.