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Thank you for joining us on this call today. John F. Kennedy once noted that economic growth requires “the maximum development of every young American’s capacity.” College remains the gateway to the middle class for millions of Americans. Over the course of their lives, college graduates will earn nearly a million dollars more than they would without that degree.
Unfortunately, as so many families are all too aware, the cost of higher education has been rising steadily, even as household balance sheets have been battered by the financial crisis. As a result, more students and their families are taking out loans in order to afford college. The Bureau estimates that outstanding student loan debt currently totals about $1.2 trillion – which makes it the second largest debt load for American consumers after mortgages.
These rising levels of student loan debt also have a domino effect on our economy and on our society. In recent months, a growing chorus of analysts has joined the Bureau in documenting how this rising debt burden may be holding back the economic recovery – slowing household formation, discouraging business start-ups, inhibiting first-time homeownership, and limiting the mobility and options of young graduates who would otherwise consider, say, working in rural communities or as teachers.
Managing this debt load can be a challenge for borrowers – especially for those who run into trouble, facing a financial shock or a bout of unemployment. Loan servicers are the primary point of contact on student loans for more than 40 million Americans. Their duties typically include managing borrowers’ accounts, processing their monthly payments, and answering their questions when things do not go according to plan. Borrowers can contact their servicers in the event of a hardship to enroll in alternative repayment plans, obtain deferments or forbearances, or request a modification of loan terms.
As the recession decimated the job market for young graduates, a growing share of student loan borrowers reached out to their servicers for help. The problems they have encountered bear a striking resemblance to the problems faced by homeowners in the run-up to the financial crisis.
We have heard complaints from private student loan borrowers that their servicer is not held accountable for answering their questions and providing quality customer service. Borrowers have complained that they had trouble making prepayments or partial payments on their loans. They have also complained that when their loans were transferred between servicers, their paperwork was often lost and processing errors were made that resulted in late fees.
We have seen especially shameful examples of poor servicing when servicemembers, simply trying to obtain hard-earned benefits, find themselves thwarted by burdensome paperwork and other obstacles. Many of these borrowers did everything right; they worked hard and made years of monthly payments, but still cannot find any help to get out of those high-rate loans. We know that student loan servicers can have a profound impact on borrowers and their families. So we need to make sure they are complying with federal consumer financial laws.
Today we are doing just that by finalizing a rule we proposed in March – a rule that allows us to supervise certain nonbank student loan servicers for the first time. Given how quickly this market has grown and the recent uptick in delinquency rates, it is important for us to ensure that borrowers receive appropriate attention from their servicers.
Congress authorized the Consumer Bureau to supervise nonbank “larger participants” in consumer financial markets as we define them in rules. Under today’s rule, any nonbank student loan servicer that handles more than one million borrower accounts will be considered a “larger participant” and will now be subject to our supervision. We estimate this threshold will cover the seven largest student loan servicers, who service the loans of tens of millions of borrower accounts. The rule applies to servicers regardless of whether they handle federal or private student loans. And it also levels the playing field by covering the larger nonbank servicers, since our examiners are already supervising the largest student loan servicers that are banks.
The Department of Education administers the federal student loan programs that comprise more than 85 percent of the market, and we will continue to work closely with them. By making sure these companies comply with federal consumer law, we can ensure that the marketplace for student loans is operating more effectively.
We will be keeping a watchful eye over any servicing company that engages in unfair or deceptive acts or practices toward student loan borrowers. Today’s rule affects one out of every five households in this country and will help address our broader concerns that unmanageable student loan debt may be dragging down people’s lives.
At the Consumer Bureau, our mission is to remove unnecessary barriers for consumers and empower them to make responsible financial choices. We also have a duty to carry out evenhanded oversight of industry while promoting fair and transparent markets. Today’s rule gives the Bureau visibility into the complete cycle of student loan debt, from origination through servicing to debt collection and credit reporting.
Student loans allow many Americans to pursue opportunities through higher education that they could not otherwise afford. And we are grateful to the Department of Education for working so closely with us to protect student borrowers. They should be able to avoid unnecessary problems while being treated fairly throughout the process of paying off their debt. Thank you.
The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.