Three Ways to Fix Private Student Loan Troubles

Career College Central Summary:

  • The Consumer Financial Protection Bureau's recent report on private student loans drew a sharp critique from lenders, who claim that the CFPB unfairly singles out private loans while ignoring problems with federal student loans. While the federal loan program has issues of its own, private student loans have distinct concerns.
  • Congress instructed the CFPB to pay special attention to private loans precisely because they have a problematic history of causing long-term financial distress to borrowers. In the early 2000s, private student loans followed a path similar to mortgage lending. Securitization led to mushrooming growth of questionably underwritten, variable- and high-interest-rate loans, which suffered high default rates after the economy crashed. Many borrowers today suffer from the loans made before the market corrected…
  • Private loans taken out by students at for-profit colleges also deserve particular attention. Private loans taken out by students at for-profit colleges also deserve particular attention. Twelve percent of all students attending for-profit colleges in 2011-2012 had private student loans, down from 40% in 2011-2012, according to the latest available data. As indicated by the CFPB's current lawsuits against Corinthian Colleges and ITT Tech, the private student loan programs created by for-profit colleges in concert with lenders and other third parties after the credit market constricted were often based on deception and other illegal practices. These programs may still be making loans with very high default rates. Regulators should take swift action to ensure that Corinthian and other for-profit colleges do not continue these programs and seek restitution for borrowers. Banking regulators should also advise their financial institutions that these are high-risk programs.

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AMERICAN BANKER

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