The Government Takes Aim At Risky Student Loans

Congress should consider allowing students to discharge loans in bankruptcy and require schools to do more to protect student borrowers from taking on risky loans. These are two of the conclusions of the first government study (PDF) of the $150 billion private student loan market.

The study, mandated by the Dodd-Frank Wall Street reform law and published by the Consumer Financial Protection Bureau and the Department of Education, found that during the economic boom, private lenders sold high-risk student loans to increasing numbers of students, growing that market by $15 billion from 2001 to 2008.

Many of the loans had lax underwriting standards. Minimum credit score requirements were lowered to sell more loans. Often loans were marketed directly to students, bypassing financial aid officers who advise students when they make such decisions. “In many cases, the school could not review the borrower’s financial need, compare it to the loan amount, or even verify that the borrower was enrolled,” the report says. (The report does not point fingers at the business practices of any single lender.)

Many students took out private loans before exhausting all opportunities for federal loans, suggesting that the difference between private and federal loans was unclear to them.

Defaults have gone up steadily. About 850,000 loans—just over 5 percent of all private loans—worth more than $8.1 billion are in default. The government measures defaults by loan, not by student.

“Subprime-style lending went to college and now students are paying the price,” U.S. Education Secretary Arne Duncan said in a statement.

According to the agencies, things have improved after bottoming out in 2008, when the Department of Education essentially bought up the private loan market as part of the massive government bailout. Lending standards have tightened since then, making it harder for lenders to sell loans and pushing them to make it easier for borrowers to repay. In 2011, 90 percent of private student loans had a creditworthy co-signer, compared with only 67 percent in 2008. School financial aid offices now review 90 percent of loans. Both agencies are developing online tools to help students do comparison shopping for loans and understand their obligations.

“Students were yet another group of consumers that were hurt by the boom and bust of the financial crisis,” Consumer Financial Protection Bureau Director Richard Cordray said on a conference call with reporters. “They are now overwhelmed by debt and regret the decision.”

The agencies say they can only go so far in recommending changes to protect students. The rest is up to Congress.


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