Home > Students > CFPB Report Needs a Brighter Light on Private Student Loans

Comments 2 Comments

This past Friday, the Consumer Financial Protection Bureau (CFPB) issued its report on private student loans (PSLs).

It describes how PSL growth exploded during the run-up to the 2008 collapse—and even since that time—because of the same credit underwriting, regulatory oversight and consumer disclosure deficiencies we’ve seen with other types of lending(mortgages would be a pretty good example). The report also sets forth a series of sensible recommendations for the future, which are further reinforced by the secretary of education.

The CFPB document is, in many ways, damning—of the financial institutions that deliberately bypassed college financial aid offices in order to market costly and complicated loan products directly to a naïve and needy customer base; of a Congress that permitted consumer protection laws (most notably those pertaining to bankruptcy) to be weakened to the point that a generation of young, imprudent borrowers is threatened; and of the schools that took advantage of the easy money their poorly informed student-customers had access to.

[Credit Score Tool: Get your free credit score and report card from Credit.com]

But for all the light this report sheds on a problem that’s become a crisis, I wish there had been more, particularly in the following areas:

Free Credit Check & MonitoringInterest Rates

The CFPB describes how loan rates are set and how variable payment plans can significantly affect affordability. It also discusses how previously weak credit underwriting now carries much stricter standards (for example, cosigners are now required for more than 90 percent of the loans) and how profit margins have widened overall.

However, while these stricter underwriting and pricing standards may be linked to borrower (and cosigner) creditworthiness, the CFPB fails to call into question the connection between this risk-based pricing approach, as it’s known, and the principal offset against that risk—that is, the virtual inability for these debts to be discharged in bankruptcy.

High risk equals high rates; low risk equals low rates. You can’t just pick the best part from each of these equations—high rates and low risk—and yet, that’s exactly what PSL lenders continue to do.

Loan Workouts

The report also highlights the failure of lenders and the companies that service the loan contracts to provide “rehabilitation” assistance that’s comparable to the government’s Income-Based Repayment and Loan Forgiveness programs. And while it correctly attributes part of the problem to the securitization process, where the ownership of these loans is harder to pinpoint, the report doesn’t mention how it typically provides ample latitude for the remediation of problem accounts.

Therefore, I have to conclude that the investors and/or their agents are simply choosing not to intervene, and wonder whether this decision is tied to the aforementioned bankruptcy limitation.

Modifying the bankruptcy laws—as the CFPB recommends for Congress to consider—will force the private lenders, investors and their loan-servicing agents to see the error of their ways.

[Related Article: Student Loans Need an Overhaul, Not Small Changes]

Loan Portfolio Management

Speaking of loan servicing, the report doesn’t address the relationship between the entities that manage routine repayments and those that deal with problem accounts, whether they fall under the private or government-sponsored programs.

In particular, I’m focused on relationships such as the one between Sallie Mae and its subsidiary Pioneer Credit Recovery, which happens to be one of the government’s nearly two dozen authorized private collection agencies (PCAs) that are tasked with collecting past due and defaulted student loan payments.

There’s nothing remarkable or inappropriate about the concept of a loan originator owning a debt collections company. In fact, there’s a good case to be made for the efficiencies to be had in a distressed account’s seamless transfer from one side of a lending operation to another.

But because money’s involved—a lot of money, actually, as nearly $1 billion in fees were paid by the federal government to its PCAs in 2011, according to the National Consumer Law Center’s May 2012 report—I think it’s important to zero in on how these firms guard against gaming the system by “managing” their delinquencies.

I’m talking about a process that allows loans to slip into past-due status for the benefit of the additional revenues that come from the late fees and other collections-related charges that are typically assessed.

Let me put it this way: loan servicers earn money for collecting loan payments in the normal course. They earn even more money for collecting problem loan accounts, and all of it is in addition to whatever they may have earned to originate the loans in the first place. As such, I worry about the temptation to double or triple dip.

[Related Article: More Taking on Student Loans, But Find Degree Is Worth Less]

Loan Amount Limits

One of the recommendations the CFPB makes is for PSL lenders to obtain certifications from the schools that its students’ prospective borrowing amounts don’t exceed their actual education-related needs, which the CFPB views as a way of curtailing excessive borrowing. I would prefer to see this done a little differently.

Undergraduate Stafford loan limits should be increased on par with the average starting salary for college graduates as reported by the National Association of Colleges and Employers (NACE), and loan durations should be lengthened so that their loan repayments are kept within a very manageable 10% of that projected gross salary.

For example, according to the NACE’s 2012 report, average 2011 college graduate earnings were just under $42,000. Ten percent of that is $4,200, and one-twelfth of that amount is $350. Therefore, at the 6.8% unsubsidized Stafford student loan rate, borrowers would need a little less than 17 years to pay off their loans, versus the standard 10-year repayment term (which works out to 14% of the gross salary).

One Last Thing

Given all the attention that this good report has garnered since its publication, I’m most disappointed that the CFPB didn’t leverage the publicity by addressing the most pressing issue facing student borrowers: what to do about the money they currently owe and are struggling or unable to repay.

The student loan default rate is hovering around 10% and payment delinquencies are running 27%, according to the Federal Reserve Bank of New York’s March 2012 report. Clearly, this problem isn’t going away. Not without a significant intervention.

The nation’s education loans—private and government alike—need to be consolidated and restructured within the context of an expanded Income-Based Repayment program that is more flexible and inclusive. Only then, can we hope to save a generation of borrowers who will otherwise continue to earn, produce and consume less than their parents.

[Student Loans: Research and compare options for student loans at Credit.com]

Image: Chuck Coker, via Flickr

This story is an Op/Ed contribution to Credit.com and does not represent the views of the company or its affiliates.

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team