What the CFPB should be doing with private education lenders
The Consumer Financial Protection Bureau, which starts operating on Thursday, has oversight and enforcement authority over private education loans and most private education lenders.
The Private Education Loan Ombudsman within the CFPB will respond to complaints about private education loans by students and their families and will help mediate borrower disputes with education lenders on an informal basis. Here are my recommendations to improve the private loan process.
The Private Education Loan Ombudsman should create a centralized clearinghouse for tracking complaints about private education loans. The complaints should be tracked according to type of complaint, characteristics of the loan – such as the loan amount, term and interest rates – lender and borrower and the type of college. This will allow the CFPB to identify patterns of abuse and other trends for possible enforcement actions, new regulations or other remediation.
The ombudsman should also track other data about private education loans. Currently there is very little publicly-available accurate data concerning private education loans, such as annual new loan volume, total debt outstanding and loan interest rates and fees. It would also be helpful to publish data by education level and individual college in addition to aggregate totals. This data can potentially inform public policy concerning private education loans.
The CFPB should proactively monitor lender advertising, instead of waiting for borrowers to complain, to identify and respond to abusive and problematic practices. Students are a vulnerable population, especially students who do not have any prior experience with debt. The CFPB should watch out for misrepresentation of loan terms, especially those that relate to loan costs, and misleading comparisons with lower-cost federal education loans. It is just as important to monitor for the omission of material information. For example, a lender might present a comparison chart on the monthly loan payments for several loans without also listing the total payments over the life of the loan, making one loan appear more affordable even though the lower monthly payment is due only to a longer repayment term.
The CFPB should consider requiring all private education loans to be school-certified. With a school-certified loan, as opposed to a direct-to-consumer loan, the lender confirms enrollment with the college and seeks approval of the loan amount from the college’s financial aid administrator before disbursing the loan. This gives the college the opportunity to teach the student about smart borrowing, such as the benefits of borrowing federal first. It helps students minimize the cost of their loans and avoid over-borrowing. It also helps the lenders by reducing the opportunities for fraud. The Dodd-Frank Act stopped short of requiring all private education loans to be school-certified, but the CFPB could establish such a requirement as part of it’s regulatory oversight authority.
The CFPB must ban discrimination in credit underwriting for private education loans. There is a patchwork of anti-discrimination rules for federal education loans, but no similar restrictions on private education loans. Protected categories should include race, color, national origin, religion, gender, marital status, sexual orientation, age and disability status. This ban should apply to both loan approval and loan interest rates and fees.
The CFPB should require lenders to send loan statements to borrowers at least quarterly while the student is enrolled in college. These statements should report the total debt outstanding, including accrued but unpaid interest and capitalized interest, as well as the increases since the last statement. The statement should also list the current interest rates on the loans. This will help prevent surprises when the student graduates and increase awareness of the debt, potentially helping students to minimize how much they are borrowing.
The CFPB should recommend a repeal of the bankruptcy exception to discharge for private education loans. This will encourage lenders to be more accommodating to borrowers who are experiencing financial distress. The exception to discharge should be repealed for all types of loans, including loans made by both nonprofit and for-profit lenders. While some lenders have argued that a discharge should be permitted only after the borrower makes a good-faith effort to repay the loans over a five-year period, it is unclear why private education loans should be treated any differently than credit card debt. The anti-abuse provisions of the U.S. Bankruptcy Code should be adequate to prevent able-bodied students from discharging debt immediately after graduation. But if a five-year period is necessary, it should be encoded prospectively in addition to retrospectively. For example, the circumstances that prevent the borrower from repaying the debt should either have lasted for a continuous period of at least 60 months or be expected to continue for a continuous period of at least 60 months.
Finally, the CFPB should establish an advisory board of students, parents, college financial aid administrators, nonprofit consumer advocacy groups, a representative of the private student loan industry and other external experts on private education loans to serve as an ongoing source of ideas and recommendations concerning private education loans.