Private student loan borrowers who are having problems paying off their obligations are being driven into default.
Distressed borrowers report that they receive little help when they get in trouble, that there are no affordable loan modifications available, and that the alternatives to default are temporary, according to a report released last week by the Consumer Financial Protection Bureau.
“The response by the private student loan industry to distressed borrowers is failing to help them avoid default,” said Rohit Chopra, the bureau’s student loan ombudsman. “Too many borrowers are barely treading water, losing hope that these companies will throw them a lifeline.”
The report analyzes more than 5,300 private student loan complaints between Oct. 1, 2013, and Sept. 30, 2014, an increase of 38 percent over the previous year.
It states that many consumers would repay their loans, if they could qualify for a payment plan that reflected their current financial circumstances. But, instead, many of these borrowers are being driven to default because no viable repayment options are available to them.
When consumers default on their private student loan, the whole balance may become due immediately. This usually causes damage to a consumer’s credit profile. It can also negatively affect a consumer’s ability to pass a background check for a job, obtain housing, and limit access to other forms of credit.
In 2005, changes to federal bankruptcy law made it more difficult for consumers to discharge this debt. These changes may harm borrowers in distress and create a disincentive for lenders to help them.
In 2012, the bureau and the Department of Education recommended that Congress re-examine the 2005 bankruptcy code changes.
In May 2013, the bureau suggested the following options in a report:
- Lower payments if the repayment term is extended for more years.
- Provide an interest-rate reduction.
- Reduce the outstanding principal balance because it could lead to higher levels of recovery for borrowers in the most trouble on the riskiest loans.
In July 2013, the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Federal Reserve Board of Governors issued a joint statement to financial institutions encouraging them to work with private student loan borrowers facing distress.
However, the bureau said complaints and other market data suggest the industry isn’t making significant progress toward increasing the number of loan modifications.
In March, the bureau’s rule allowing it to supervise some of the nation’s largest nonbank student loan servicers went into effect.
The bureau estimates that there is $1.2 trillion in outstanding student loan debt, with more than 7 million Americans in default.
See The Huffington Post article “Consumer Regulator Vows Action as Student Loan Borrowers Suffer” for more information on this topic.
Helping borrowers in distress
To help consumers, the bureau offers:
- A sample letter consumers can edit and send to their student loan servicer to request lower monthly payments and information on repayment plans.
- A sample financial worksheet to help borrowers figure out the most funds available to pay their student loans.
- A Repay Student Debt webpage. It offers options for paying off student debts, especially when facing default.