As more borrowers fall behind on their private student loans, a U.S. consumer watchdog is pushing to make those payments more affordable.
The Consumer Financial Protection Bureau last week said it’s seeking proposals on ways to make debt repayments more manageable for borrowers of private student loans — especially those who encounter financial hardships. In a call with reporters on Thursday, Rohit Chopra, the CFPB’s student-loan ombudsman, said private student-loan borrowers face bigger challenges than those with federal loans because they typically don’t have flexible repayment options, such as “income-based repayment,” where borrowers make payments based on their income rather than the amount they owe, and “extended repayment,” which lowers the monthly payment by lengthening the loan’s duration.
Currently, repayment options for private-loan borrowers who fall into hardship vary by lender — though they tend to be fewer and more limited than what federal loans offer.
The bureau is also exploring other options, such as letting private loan borrowers refinance their loans. That would allow them to take advantage of low market rates, which in turn would reduce their monthly payment. Comments from lenders, colleges and the public are due by April 8, after which the bureau will announce recommendations for altering private loans.
The new initiative comes as more students take on this debt — and growing numbers of them fall behind on payments. Students who graduated with a Bachelor’s degree last spring left school with roughly $28,700 in student debt, up 31% from five years ago, according to FinAid.org, which tracks student-loan debt. Meanwhile, 11% of student loans were 90 days or more past due in the third quarter, up from 8.8% a year prior — and marking the highest level of student loan delinquencies since at least 2003, according to the Federal Reserve Bank of New York.
However, data on federal loan defaults suggests that more repayment options do little to reduce the number of defaults. Roughly 850,000 private student loans that went into repayment from 1998 to 2009 are in default, according to the CFPB. During that period, nearly 2.1 million federal student loan borrowers defaulted within two years of entering repayment, according to data from the Department of Education.
Private student-loan borrowers could buck the trend, though, says Mark Kantrowitz, publisher of FinAid.org. He says many federal loan borrowers fall behind even with repayment plans because they haven’t had to meet credit criteria in order to qualify for the loan in the first place. In contrast, private student-loan applicants must pass lenders’ underwriting requirements before they can get the loan. Since they have better credit, they may also be more likely to keep up with a repayment plan, he says. “The key is to lower monthly loan payments even if just for a few years—that would help them a lot,” he says.
Such relief periods could help them catch up on payments or provide enough time to find employment. Currently most private loans offer forbearance, which postpones loan payments, to borrowers who are unable to pay because of unemployment, underemployment, or other circumstances, for a year or at times longer if the borrower agrees to pay interest during that period. In contrast, federal loan borrowers can postpone payments for up to 8 years if they qualify for deferment and forbearance.
The federal government also offers payment plans that help borrowers lower their monthly payments by either extending the repayment period of the loan or starting out with lower monthly payments that gradually increase each year. It also allows qualifying borrowers to repay loans based on their salary rather than their debt load, which can be helpful for graduates who end up earning less than they expected.
Sallie Mae, the largest private student-loan lender, says it offers borrowers who demonstrate financial hardship “customized assistance,” including lower interest rates and temporarily suspended payments, which it believes “is consistent with the CFPB’s vision.” The company says it has modified more than $1.3 billion in private education loans since 2009.