CFPB: Private student loans need clearer terms
Friday, July 20, 2012
WASHINGTON, DC – A new report released today by the Consumer Financial Protection Bureau (CFPB) and the Department of Education outlines the deceptive practices that have found their way from the mortgage industry to the private student loan business. The report finds that the private lenders engage in the same risky practices that led to 2008’s financial collapse, including lending money without considering whether borrowers could repay the loan and then bundling the bad loans to sell off to investors.
Consumers Union, the policy and advocacy division of Consumer Reports, called the report an important look at a predatory industry that needs to be reined in.
“It is dangerous to repeat the mistakes of the subprime mortgage industry that helped cause our country’s financial crisis. With our nation’s student loan debt now larger than credit card debt, it is critical that consumers aren’t being taken advantage of by private lenders prioritizing profits over responsible banking,” said Pamela Banks, senior policy counsel for Consumers Union. “We urge the CFPB to take steps to make these private student loans more transparent so consumers know what they’re getting and aren’t duped in to faulty loans by predatory lenders.”
In addition, many borrowers might not have clearly understood the differences between federal and private student loans, or believed that their private student loans would have similar features to federal loans.
The report also highlights the fact that due to a change in bankruptcy code in 2005, it is almost impossible to eliminate private student loan debt by declaring bankruptcy. Consumers also find lenders unwilling to refinance or modify the loans, leaving them locked in to a debt that they simply cannot pay.
“Student loan debt is unlike any other because it becomes a lifelong trap for consumers. On top of it, these are private loans that wouldn’t even be offered under current standards,” said Suzanne Martindale, staff attorney for Consumers Union. “Consumers are struggling now to pay back loans that should never have been offered to them and are paying the high price. We need to address ways for lenders to work with consumers to find ways to pay off these loans, rather than seeing loan defaults on the rise.”
Kara Kelber, 202-462-6262