The CFPB’s New Student Loan Fixes
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UPDATED: Jul 31, 2012
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The Consumer Financial Protection Bureau (CFPB) recently released a report on the private student loan industry, commenting on borrowing behavior and proposing what they believe would be adequate solutions to common problems with the current system.
Included in the report’s recommended solutions section were five personal suggestions from CFPB Director Richard Cordray.
Cordray’s recommendations are each geared toward helping students responsibly borrow money for college.
Lenders Should be College-Certified
According to Cordray, the first correction that should be made to our private student loan system is imposing a requirement for individual colleges to certify individual private lenders.
Currently, students “self-certify” themselves, acting as their own gatekeeper between lender and school. Consequently, young students who are excited to live on their own often over-borrow and unknowingly dig themselves into a deep hole of debt over the term of the college career.
If all lenders who issued private college loans were forced to be certified from the high education institutions themselves, then colleges could act as a sort of check and balance, ensuring their certified private lenders are not “over-lending” students.
Expand the Student Debt Bankruptcy Laws
Cordray would also like to consider the notion of allowing private student loans to be discharged through bankruptcy.
“We heard from many distressed student loan borrowers facing trouble making payments on private student loans due to limited options for alternate payment options,” wrote Cordray in the report. “Consumers, as well as businesses, have been able to restructure other types of debts through bankruptcy as a last resort.”
Since private lenders offer very few helpful options for distressed borrowers, the CFPB’s director believes expanding the bankruptcy rules may be the nation’s best option.
Clarifying the Truth-in-Lending Act
The Truth-in-Lending (TIL) Act was originally established in 1968 and it is largely due to the TIL Act that consumers receive all of the disclosures they do when it comes to financing.
However, according the report the TIL Act “defines a private student loan as a closed-end loan for postsecondary expenses not borrowed through programs under Title IV of the Higher Education Act.”
Because of that definition, many private loan borrowers—such as those who take out lines of credit—find themselves without the proper disclosures. Cordray says Congress may want to consider expanding the TIL’s definition of private college loans to encompass those options that escape the TIL Act’s grasp.
Cordray believes that many borrowers don’t know the difference between federal and private student loans. This problem is further compounded because many borrowers often take out both federal and private financing from the same lender.
“Because many borrowers have both types of loans from the same lender, many borrowers are confused about how much they owe and to whom,” said Cordray in the report.
He continued by saying that borrowers are confused “even as they decide whether to take on more debt for additional years in school.”
It’s not hard to see how this lack of education can lead to over-borrowing or irresponsible borrowing.
To remedy this, Cordray wishes Congress to establish a centralized, publicly-accessible database that will outline all private loan obligations for each individual borrower.
Borrowers Should Be Told the Worth of a Degree
Finally, Cordray argues that many borrowers are spending substantial sums of money on a degree under false pretenses about the wages their degree will ultimately yield.
“Consumers need more and better information about post-graduation outcomes, such as employment and wage expectations by program of study, before they decide on which school to attend or continue attending,” said Cordray.
This suggestion has little to do with lenders, and instead shifts focus to colleges and government data-collection agencies. If these two sources provide better information on the “worth” of each degree, we may very well see a decline in student loan borrowing for certain study paths.