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Help stop the student debt domino effect

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Today, we announced that we’re gathering information to come up with a plan to address the challenges many struggling borrowers face to find a more affordable payment plan on their private student loans. We need your ideas and help to stem the tide of trouble for many student loan borrowers.

Student loans are a critical part of the consumer finance marketplace — a way for millions of Americans to attend college and climb the economic ladder. But rising balances and distress in the student loan market raise questions about the domino effect on the rest of the economy and society. Will young consumers with large amounts of student loan debt be able to start small businesses and buy homes like generations before them?

Policy makers and financial institutions have taken steps to ensure that lending is safer. Many loans of all types made in years leading up to the financial crisis would likely not be made today. But those already stuck with heavy debt burdens and looking for some way to pay it back, want to know: what about us?

Most of the student loan market consists of federal student loans, which allow most borrowers to avoid default through the income-based repayment options in times of hardship. But private student loans – a market which boomed in the years leading up to the financial crisis – generally don’t.

Over the last year, we’ve heard from thousands of private student loan borrowers willing to make good on their debts but seeking a more affordable payment, especially when navigating tough times. One of the top complaints we’ve heard from private student loan borrowers was the inability to refinance or negotiate an alternative repayment plan with their lender or servicer.

This is a familiar story. Since the financial crisis, millions of homeowners have sought more affordable mortgage payments by refinancing and locking in rates at historically low levels. Others pursued loan modifications to avoid foreclosure with mixed success. But for many private student loan borrowers, finding a more affordable payment has been a frustrating experience.

We also hear from lenders, who want customers to be successful and ultimately repay their loans. That’s why we’re looking to put together some creative solutions to find private student loan repayment plans that borrowers can actually afford.

We need your input to help student loan borrowers experiencing distress and default. Learn more about this project and how you can contribute ideas. We want to hear from borrowers, lenders, schools, and everyone with a stake in the success of this market by April 8th.

In the coming months, we’ll release your input and our ideas on how to address this piece of the student debt puzzle. Stay tuned.

Rohit Chopra is the CFPB’s student loan ombudsman.

  • fadler

    I borrowed money on the National Defense Student loan program as individual notes yearly. When I started repayment, there was a coordination of the individual notes to create individual payments to those notes based on what they believed I could afford to pay. I paid all my debt. I noted with my children’s debt, it was all put together under unsubsidized loans. Since so many are not finding jobs or they are just taking what used to be before or in college type jobs (fast food), one would think it would be possible to simply accumulate interest on the notes if there was no income and only require “interest only payments” if the individual had employment and tax filings indicating ability to pay. My children both have already paid their debt. I understand that perhaps we should loan less money in the student loan programs with less coming back which is sad but somehow the second issue of school costs going up so exponentially the last decade need to be addressed or there truely will be more internet schooling despite protests from professors. The only students that used to rack up this new level of debt were in training for professions which could pay the debt (doctors, lawyers, engineers). It is not right to blame the “system” for allowing foolish degrees and it is personal responsibility to pay back what is borrowed so that an effective “pay it forward” system exists for future students to borrow needed money.

  • Don Quixote

    First order of business should be to remove private lending institutions from the picture all together. In most cases, these loans require a co signer so the end result is if the loan goes into default, you have two people in debt instead of one. Co signers risk having a judgement issued against them for money that they often did not use or benefit from. Once the loan is in default, the lender is no longer required to even provide a statement of how much is owed or what payments have or have not been paid. If credit cards can be issued to students without a cosigner, then student loans should be issued without a co signer as well.

    Deferments on college loans should be slowly phased out. Students should be responsible for making payments on their loans after the first semester. If students had to contribute to their college financing, they might be more inclined to be aware of what student loans cost and to seek out more scholarships, grants, work study programs and job opportunities. Students as well as parents are often surprised to learn how large the debt has grown when their student finishes school. Paying at least a portion along the way would be beneficial to all parties in the long run.
    Private lenders should be required to give students and their cosigners an opportunity for restoration of their credit status if they have defaulted once they have made payments consistently for a specified period of time or once a specified percentage of the loan has been paid off. This would be economically preferable to not receiving any payment at all.

  • Gwen

    I received a private loan from Teri loans in 2005 and I had a total of 5 loans totalling 20k. Not including the private loans from Sallie Mae. The loans became due BEFORE I graduated from college and the interest rates were so HIGH!! I didnt find a job forattorneys/collection agencies asking me for 3k-4k down before they can work out a reasonable payment plan. I didnt have that kind of down payment making 15/hr with a MBA. It was difficult for me and I wanted to clear these loans as soon as possible to get my life back on track. I am very frustrated with this and I think it would have helped if they would have had a in-school deferment program which would have allowed me more time to get almost 3 years after getting the loans so they went into default. I have been getting calls from different gainful employment after graduating. I am now making over 40k and can afford to pay something on them along with the federal ones that I have, but they are in default already. I have to send what I can and thats really I all I can do. They need to offer alot more options, forgiveness, deferments, income-based payment plans. etc. I would like to purchase a home and am unable to do that at this time until I can make do with these private loans that I have.

    • Gwen

      Somehow my wording was switched around. I didnt find a job almost 3 years after getting the loans therefore they went into default, and I recieved collection calls asking for a large down payment that wasnt doable either.

  • Owen

    First, private lenders need to improve their in-school deferment options as many graduate students begin repayment while in graduate school and in some cases are seeking to borrow to pay on what they already borrowed since they have little to no income as a graduate student. Secondly, I agree that to increase successful repayment and lower default rates income based repayment options are a must. I don’t agree that student loans should be forgiven in bankruptcy. There are many students borrowing, burying their head in the sand, and not thinking about future implications – they just want money in their pocket right now. I have actually heard a student in the lobby of a financial aid office say “I’m going to borrow as much money as I can because I am going to just claim bankruptcy after graduation” – obviously not aware of current bankruptcy law. I believe income based repayment would help both the borrower and the lender and be a better alternative than forgiving student loan debt in bankruptcy.

  • klgosnell

    I think one important step would be to require private loan lenders to issue monthly statements to the student from the date of disbursement. The statements should show the current outstanding balance and the interest which had accrued that month. Students should have the option to pay the month interest at any time and payment stubs should be included with each monthly statement. I have found over the years that all student loans have a tendency to end up “out of sight; out of mind” until shortly after graduation/withdrawal/less than half time enrollment. By keeping this information in front of the student and giving them an easy option to pay towards the accumulating interest might keep them from borrowing as much and at least ensure they know what to expect at graduation.

  • Erin Crawford

    Simply enforce a reasonable interest rate cap from private lenders and make the rates fixed! 10.75% + is a bit ridiculous. Do not allow accrual of interest while still in school. Bam! Problem solved.

  • http://www.facebook.com/vasiliy.latipov Vasiliy Latipov

    Originally I had 36K in private loans as I graduated from school. I couldn’t make payments for about 2.5 years and my loan grew from 36K to 55K because I had to use forbearance. My average interest rate is 8.75 for 2 private loans. I tried to contact director of Sallie Mae and Sallie Mae advocate department to reduce interest rates on my loans, but they were pointing me to the Promissory Note which I signed while acquiring these loans. Also what frustrates me the most is that when I was borrowing these loans to complete my education my credit score was not strong enough and they gave me these high interest rates. Now when I have a decent job and my credit is strong – they would not be willing to refinance. Also tried refinancing through Chase and Wells Fargo and few other institutions but nobody is interested in taking over 55K loan. I think there should be good control in to these interest rates for private loans. I have no issues with my federal loan.

  • Chantelle

    Making private lenders offer the same type of repayment options offered for Federal student loans would be helpful. It is not that we do not want to pay back our debt, it’s that sometimes we cannot afford that first initial payment, especially in a down economy. Also if your student loan debt is not above a certain threshold with private lenders they will not extend the terms of your loan, the only way to lower private student loans that are not Federal.

    Lowering the interest rate on Federal loans would be smart as well. The fact that the Federal government can garnish your wages, take your tax returns, as well as other things I’m sure, they’ll get their money. The likelihood of the Federal Government never getting their money back is sustainably lower than private lenders, whose only option is selling the debt to collections agencies. My graduate student loan interest rate is 7.9% my private loans from undergrad average around 4%.

  • http://www.facebook.com/jarrod.skinner Jarrod Skinner

    I believe the first problem is to stop capitalized interest on loans. There is no other loan that allows interest that is accrued in forbearance to become part of the principal balance.

    Second, take private loan servers out of the equation all together. Without any notice they sell your loan to another entity and then you pay a new company. The borrower does not get any benefit and they simply get all the problems. You should not allow a company selling your loan to another company and force you to readjust your payee. Not every company has the same customer service standards and the same policies.

    Third, if there will be a private loan servicer, then they need to be required to follow the same rules and offer the same benefits the federal government does. I am currently a public servant and I hope to take advantage of the 10 year loan forgiveness. My previous company stated that only the federal government offers this program. Well my loans originated from the federal government, so my loans should qualify automatically. It should not depend on who my servicer is.

    Make the student loan forgiveness for public employees consistent. The rule should be ALL loans originating from the government should be eligible. The way the regulation is set up, it appears the only payments that are counted are the ones paid to the government. Again, my loans are all stafford loans. If I made 10 years worth of payments, it should not matter where my loan was consolidated.

    Finally, I should have the option to declare bankruptcy like every other American. I should not be penalized because I chose to invest in myself versus someone who charged up thousands of dollars for personal items.

  • J-C

    It is a hard situation to be on, specially if you debt is high and jobs are not paying what you expected to earn with a Masters Degree. I have tried to talk to AES requesting a lower payment or to work with them to somehow make payments more affordalbe but they have no options. They don’t care and just tell you that you have to pay or your credit will be ruined. We need to do something about this, it has come to a point that either I provide my family or pay these student loans with a part time job.

    • Karen

      Yes, my daughter has the same servicing company AES they continuously call at least five times a day, she makes payment but basically all thru the month with her three jobs. They are to be investigated.

  • http://www.facebook.com/donnakw1 Donna Kalista White

    Have the feds allow refinancing at today’s rates. They saw fit to bail everyone one else out. This would put billions of dollars into the hands of consumers and allow people to pay affordable payments. Students need be taught what these loans will cost and the govt needs to do a better job of making sure the money is actually spent to support the cost of the student’s education. The government should be helping more so that we can get more educated high tech workers and quit importing talent.

  • Rebekah

    1. The government must stop interest capitalization. It is bad enough that interest rates on American student loans are many times higher than in other Western nations. There is no morally justifiable rationale for further making graduates pay interest on their interest.

    2. Interest rates should be lowered, either offered at a discounted rate (thus the government subsidizes interest for the life of the loan) or tied to the government’s cost of borrowing, as they do in England (pre-2012 / post-2012, respectively). It is not right that, for those who take longer to pay back their loans, they end up paying 40, 70, 100 % over the amount borrowed for an already extortionate education. To say it is disheartening to watch one’s loan balance barely budge or even grow while faithfully making payments is an understatement.

    3. Once borrowers turn 24, the age at which they are considered independent for education lending purposes, they must be given the option to transfer Parent PLUS loans taken out pre-24 to be transferred into their own name, added to their federal loan balance, and thus provided with fair repayment options. As it stands, the parent or other co-signer is on the hook for loans that they may not be able to pay – I would imagine most such loans are taken out on the assumption that the student him/herself will pay them after finding a good job after graduation. Given the state of the economy and the labor market for young people, many do not find that good job and cannot pay on the loans in the early years (most of the economic gain from higher education does not begin until 8 years after graduation, and peaks in one’s later career), putting at risk the parent’s credit or jeopardizing other priorities, including retirement funding. Most families have more than one child who requires financial assistance – this is certainly the case in my own large family. Yet the Parent PLUS monthly repayment is calculated against the parent not the child’s income, a monthly sum which the low-earning student-borrower cannot possibly pay; yet s/he risks harming the parent if s/he does not find a way. This can impose a strenuous burden on family relations. Moreover, the young person likely has to pay on other loans at the same time – an insurmountable project that can lead to real financial hardship. Thus once over 24 (which is itself a bizarrely arbitrary age, given the borrower has been a legal adult in all other matters since 18), the student-borrower ought to be able to transfer the Parent PLUS loan to combine with his/her other federal loans in order to be eligible for realistic repayment options, like Income-Based Repayment.

    4. Private student loans with their predatory practices and terms should be abolished. They offer little to no benefit to borrowers beyond what federal loans offer; only distinct disadvantages. Government knows that the majority of private loan borrowers are racial and ethnic minorities and those with low incomes, who are disproportionately affected by unemployment and loan default after graduating (or leaving college without graduating, with debt but no degree / labor market advantage). Most borrowers of private loans have not maxed out what they are allowed to borrow via federal loans, which have much better repayment terms, demonstrating a clear disparity in access to information on loan options and accompanying good advice. Moreover, it is absurd that private lenders like Sallie Mae should have their private loans guaranteed by the federal government, giving them greater incentive to allow borrowers to default (meaning they will be paid the balance in full by the government) rather than working with them toward fairer repayment options. That defaults are an important source of income for Sallie Mae is no secret: they state this explicitly in their Annual Report, available on their website.

    5. Something must be done about the underlying symptom of high student debt: the rising cost of higher education. If students could still pay their tuition by working part-time or during summers, we would not have a student debt crisis. It is unreasonable to think that the human beings of America have simply grown lazier and more indulgent en masse in the last three decades; we are only supported or constrained in our choices and behaviors through institutional structures and prevailing norms and incentives. Perhaps taking out $54,000 instead of $52,000 seems inconsequential, but if the borrower could pay their fees solely through working instead of borrowing, they would not set out to borrow $2,000 on top. Additionally, more than one analysis has shown that the simple availability of federal funds, in the form of loans, is partly responsible for driving up costs; thus we have a vicious cycle of needing money to pay for high tuition, and tuition rising ever higher because that money is available via government.

    Perhaps the US government could make money available by competition for establishing new colleges that focus on education quality, teaching not research, and painstaking economic parsimony around non-educational aspects – for instance, legions of administrators, fancy gyms and buildings, and upscale student accommodation. Let’s strip away the (expensive) extraneous and get back to the core of higher education: the good development of one’s mind, exposure to diverse ways of being, and preparation for adult life.

    I hope to see a great many more contributions to this very important conversation. Thank you for the opportunity to speak.

  • Nebraska

    I cannot say this strongly enough – they borrowed the money, they need to take responsibility for paying it back – end of story.

    I don’t care WHAT the situation is; if you don’t WANT to pay it back, if you don’t think you HAVE to pay it back, if your current lifestyle does not ACCOMMODATE your paying it back, if you can’t have all the things you want AND pay it back. . . it makes no difference. It was not your money when you BORROWED it, but it it was MINE, and I WANT IT BACK!!

    IN FULL!

    If you didn’t want a loan, then you should have 1) worked your way through college (I did, and believe it or not, I lived to tell!), 2) got a job and SAVED your money to return to college (Oh, my – I did that, too – STILL LIVING!)

    This will be one of the bigger lessons in life (Oh, yes. There are MORE) – be responsible for your own decisions.

    Pay the money back. You OWE it.

    pamela in Nebraska

  • plains

    People who borrow the money should pay it back. College loans are too easy to get, especially for degrees that are not in demand. The government should not be in the business of loaning money. Taxpayers should not rescue people who made poor choices.

    People push the loans. I went with my first son to our local college non-profit organization which is supposed to help kids in their college search. We met with a counselor who insisted on explaining loans to me even though I insisted that I would never get a loan for my kid’s college. If the money I saved for them, is not enough, plenty of options exist to lower costs. One just has to be creative. Students that are creative in funding their college education should be rewarded, not the people who skip out on their loans. AP classes, community college, working while attending school, are all good options to reduce costs.
    I saved money for my kids to go thru school by sacrificing, and they worked hard in high school so they got some scholarships, and will choose schools they can afford. We will not get loans.

  • kim

    First of all, interest rates on student loans should be 3 or 4%, second if the loan goes into default tack on an extra 10% of the principal for a one time penality and third if the loan gets sold over and over again there should be a one time selling fee for the loan not 7 fees in my case. I believe you have to pay back your student loan but these so called agencies make it so hard to pay them back. My loan got sold over and over again and i dont hear anything from them for months and all of a sudden my balance is going up and up then im expected to pay more interest more penalities and more fees. I have recently been waiting for 5 months for a hearing on an income based repayment plan. All while the loan is getting bigger and bigger. Things happen that can be unexpected if a person has to use the forberance or deferment we shouldnt get penalized for it. In the case of my loan, I have all ready paid 3 times more than the original loan and Im still owe more. My $7250.00 has turned out to be a $30,000.00 loan This is a nightmare and something needs to be done so that our children have a fighting chance of attending college.

  • Karen Griffin

    our daughter has over 78K in debt not because she borrowed 78K it is because Chase loans who sold them to American Education Service do not work with these kids to have affordable payments. They have no programs which make sense. They tell you if you get a foreberance,
    you can never get one again from them. These loans charged $2500.00 origination fee from the original JP Morgan Chase loan.
    They are crooked. The reason for the next bubble is because these banks are getting bailed out by the government with no accountability. The average student debt is not $25K, it is much more than that. These banks should be held accountable.

  • Mindy

    I’d like to know where to leave my suggestions.

    You want to know why this “crisis” among private student loans is so bad? Because in late 2005 a bill was passed giving private student loans the same protections afforded alimony and child support. They are virtually impossible to get relief from. All the big banks jumped on the bandwagon and no they didn’t follow standard credit check practices. They doled out money at incredible rates – why not they had no liability. Then the schools got into it. They saw the easy money and raised their rates. Students asked for more money – they got it. Banks and schools liked their pockets with no remorse, or stop-gap measures in place. They limit deferment and forbearance periods, they don’t offer IBR, and they are more than happy to turn over delinquent accounts to collection just to add on those extra fees asap. It’s a downward spiral that can be pinpointed right back to that bill.

    Here’s my story. My husband want’s to go to a private school for training. It’s a good risk. By my accounts we can manage it. $160,000 in loans and fees later he isn’t able to graduate, can’t get a job in the industry, and because of a past felony probably never will. During this time the banks got greedy and raised rates to %18 or more. The loans are now at $270,000. We looked at options with a lawyer including bankruptcy only to be told not to bother. Even though we technically “qualify” for a bankruptcy according to the laws restrictions we will never get it – because once we win at a local level it will be repealed and repealed – and law teams from big banks and washington WILL be there to protect their cash cow because heaven forbid our case set a precedence. If we dont’ have the $ to pay the loans, how can we fight the legal system? If this were any other situation – a business fail, training for a work position, an actual private loan (not labeled student) etc it wouldn’t be an issue.

    So now with no bankruptcy, no ibr, no deferment, no legal recourse, banks tacking on more late fees and a family budget too tight to buy clothing and gas let alone pay these loans we are literally stuck in limbo. The only option the banks have is legal and since we have no assets we’ve decide that a fair 25% garnishment capped at around $250/month is a sight better than the actual payments we are staring at – roughly $1700 a month for the next 40 years. My husband would be 80. Looking at IBR numbers we would owe almost nothing a month for 20 years.

    So my first suggestion would be to repeal the possibly illegal law set in 2005 protecting private institutions. The second would be to fine private banks for their greed and bad credit review processes by doling out cash because of having no liability. No sane person would have given us the $ amount they did back in 2007-08. The third would be to demand an interest rate cap on ANY student loans at less than 5%.

  • Debt

    How about we start with only lending students what they need to pay tuition and fees and not letting them walk away with a $10,000 refunds. How much of the student loan debt is not being used to pay for their education? I have seen students who take 2 classes to qualify for aid, work full-time, and walk away with a $10,000 check to cover living expenses. I don’t know about you, but I do not need 10K for living expenses for 15 weeks, on top of what my take home pay is working full-time.

  • Sarah

    The student loan problem extends beyond the private market. Government sponsored loans are just as unaffordable and burdensome as private loans. With my government loans, over the course of paying these loans, I will be $20,000 more in interest then the starting principal balance of my loans. Because of the high fixed interest rate of my student loans, I have no discretionary cash. What this means for the market and new young professions is that for the next 30 years we will not participate in the market like previous generations. We will spend the first 30 years of our working lives trying to pay down debt. In addition, typically banks charge higher interest rates because there is a higher risk of default by the borrower. However, student loans for the most part are undischargable, even in bankruptcy The risk of default is not present for government student loans, thus the higher interest rates are not warranted.

    I appreciate prior recommendations that people should work and pay for school, but when in-state tuition ranges near $17,000 (not including interest) in addition to living expenses and a few thousand for books each semester, in the given market, this is not always a practical option.

    As the market continues to change and become more integrated, it is essential that Americans continue to receive higher education because Americans now have to compete for jobs with other countries. Education all walks of society means that people will be given the tools to be independent and earn a living for themselves.

    To not address this issues of outrageous education costs and crushing student loan debt would be short sited for all generations.

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