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Too Big to Fail: Student debt hits a trillion

Recently, we undertook what we understand is the first major effort to understand the size of the private student loan market. This market went through the same boom and bust cycle we saw play out in markets for mortgages and other credit products.

Our initial findings on the size of the private student loan market are sobering. When we add in the outstanding debt in the federal student loan program, it appears that outstanding student loan debt hit the trillion dollar mark several months ago – much larger than estimates from other recent reports . It seems that this market is too big to fail.

Unlike other consumer credit products, student debt keeps growing at a steady clip. Students borrowed $117 billion in just federal student loans last year. And students continue to borrow private student loans, which lack the income-based repayment and deferment options of federal student loans. If current trends continue, there will be consequences not just for young people, but for all of us.

According to data from the Department of Education , federal student loan debt isn’t growing just with new originations – with so many borrowers unable to keep up with interest payments, debt is growing even for many who have left school. Too much debt means too much risk for a generation of young people, many of whom are struggling in today’s economy.

The lines of job-seekers are long, states are reducing their higher education budgets, and household budgets are straining. Young consumers are shouldering much of the punishment in the form of substantial student loan bills for doing exactly what they were told would be the key to a better life. Large levels of debt might also pose immediate problems for the rest of us.

Excessive student debt can slow the recovery of the housing market. Student loan borrowers are sending big payments every month to their loan servicers, rather than becoming first-time homebuyers. This debt can also put added stress on the borrowing capacity of the household and government sector.

At the CFPB, we are attacking the problem on multiple fronts. Working with the Department of Education, we launched a Know Before You Owe project to solicit input on a “financial aid shopping sheet.” The sheet should help students understand the debt implications of their college choice. We are supervising private student loan providers to ensure they comply with Federal consumer financial protection laws. We are providing tools for borrowers to help them navigate their student loan repayment options. And we set up a student loan complaint system to help ensure that private student lenders and servicers are responsive to potential mistakes and problems that borrowers encounter.

Before we opened our doors, these duties were spread across a myriad of federal agencies. Bringing these functions under one roof means we can better ensure that financial institutions operating outside of the traditional banking system are subject to the same rules of the road as all of you.

But consumer protection is just one piece of preventing a student loan market meltdown. The financial services industry, the higher education community, and policymakers all bear responsibility to address the underlying causes of the growing debt levels.

We all need to understand better and address a number of concerns, such as rapidly rising defaults in the for-profit college sector and high borrowing to gain training in fields with limited opportunities post-graduation. We also need to find methods to get struggling borrowers into alternate payment programs quickly so they can avoid default.

We will continue our conversations with many of you about the steps you have already taken to reduce risk in private student lending. And we can keep exploring what can be done within the realm of consumer financial protection for those who have already graduated with too much private student loan debt.

This summer, we’ll release the full results of our study on the private student loan market. Until then, we must all act to address the impacts that student loan debt has on all of us.

Rohit Chopra is the CFPB’s student loan ombudsman. This post is excerpted from remarks delivered before a conference hosted by the Consumer Bankers Association on March 21, 2012, in Austin, Texas.

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