Consumer Advocates Urge Congress to Make the Private Student-Loan Market More Borrower-Friendly

July 24, 2012

Borrowers of private student-loans need better, more-flexible options for repaying their debt, consumer advocates and an official with the Consumer Financial Protection Bureau told a U.S. Senate panel on Tuesday.

Rohit Chopra, student-loan ombudsman for the bureau, said that Congress should seek to make it easier for former students to modify the terms of their private student loans. Unlike most other forms of consumer debt, private student loans are difficult to refinance and cannot be discharged in bankruptcy, he said.

"Even some of the most responsible borrowers—those who may be making significant sacrifices to make payments on their private student loans—have sought help to better manage their debt burden," Mr. Chopra said in prepared testimony.

The hearing, held by the banking committee's Subcommittee on Financial Institutions and Consumer Protection, came several days after Mr. Chopra's agency and the Department of Education released a report that found that a boom in private student loans between 2001 and 2008 involved lax lending standards and predatory marketing practices mirroring those that fueled the subprime mortgage crisis.

The country's mounting student indebtedness does not pose a systemic risk to the banking system like subprime mortgages did, Mr. Chopra said, but the debt still threatens to "act as a drag on economic recovery." Borrowers carrying high debt burdens may delay homeownership and contribute less to their retirement plans, he added.

"Policy makers have paid significant attention to the refinancing and modification conditions in the mortgage market," he said. "But given the potential impact of student debt on the broader economy, the situation is rapidly demonstrating the need for attention to determine whether action is required."

The report recommends that Congress consider putting in place more consumer protections in the private student-loan market, such as providing more transparent disclosure statements and requiring colleges to certify private loans before they are disbursed to help students avoid overborrowing.

Deanne Loonin, a lawyer with the National Consumer Law Center, said that many private lenders have not adopted any meaningful long-term repayment options or loan-modification policies that actually help students buried in debt.

Although many of the predatory practices that some private lenders engaged in before 2008 have mostly ended, she said, former students are still saddled with the debt.

"The lenders have moved on, but the borrowers haven't been able to," Ms. Loonin said.

Jack Remondi, president and chief operating officer of Sallie Mae, the nation's largest private provider of student loans, said in prepared testimony that his company was already voluntarily requiring colleges to certify loans and was taking other steps to work with borrowers who are having trouble repaying their debt.

The report from the Education Department and the financial-protection bureau also urges Congress to consider changing a 2005 law that eliminated private student loans from being included in bankruptcy protection. Private lenders such as Sallie Mae pushed for that legislation at the time.

But the company has reversed course on the issue over the past several years. Sallie Mae now supports, with some conditions, a legislative change that would restore bankruptcy protection to student loans, Mr. Remondi testified on Tuesday.

"Sallie Mae supports bankruptcy reform that would require a period of good-faith payments, that is prospective so as not to rewrite existing contracts, and that applies to federal and nonfederal education loans alike," he said.

But despite Sallie Mae's support, expanding bankruptcy protection to federal loans is unlikely to go anywhere. Federal loans have been exempted from discharge in bankruptcy since 1978, and allowing borrowers to discharge them would likely leave taxpayers on the hook for losses, a politically-controversial proposal that neither party has proposed.

Consumer advocates say that although federal loans cannot be discharged through bankruptcy, they still represent a good deal, since the government offers flexible repayment terms and a program that lets borrowers to rehabilitate defaulted loans.