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CFPB getting schooled on shadowy student loan industry

by Broderick Perkins

(12/1/2011) ERATE Exclusive - The federal consumer watchdog needs training to better protect consumers from financial threats in the student loan industry.

The Consumer Financial Protection Bureau (CFPB) recently published a "Request for Information Regarding Private Education Loans and Private Educational Lenders" notice in the Federal Register aimed at obtaining student loan information from students, schools, the industry, its stakeholders and others who can help the agency open the books on the problematic industry.

CFPB will use the information to produce for Congress a "Report on Private Education Loans and Private Education Lenders," likely to become landmark research with far-reaching implications for an industry overdue for an overhaul.

The report is also designed to answer questions posed by Congress under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

Dodd-Frank created CFPB and gave it extensive powers aimed at protecting consumers in the financial services market.

"The private student loan market is one of the least understood consumer credit markets. It has been operating in the shadows for too long," said Raj Date, special advisor to the Secretary of the Treasury on the CFPB.

"Shedding light on this industry will benefit students, lenders, and the market as a whole," Date said.

The increasing costs of higher education more and more often forces students and their families to rely upon student loans to get through college. Pressure to secure funding before school starts puts families under pressure, making them vulnerable to misinformation and prone to making bad decisions.

That's exacerbated by financial aid offers (found in Financial Award Letters), which students, college counselors, and community organizations say don't always effectively deliver information.

Critics say schools' financial aid offers are too often filled with jargon, offer difficult- to-compare financing and aid options, and don't always clearly distinguish between loans, grants and other forms of aid. The industry is no stranger to scandal.

The majority of college seniors graduating in 2010 carried an average of $25,250 in debt, according to the The Project on Student Debt.

Nearly 9 percent of student loan borrowers who entered repayment in 2009, defaulted by the end of 2010, up from, up from 7 percent of those entering repayment in 2008, according to the U.S. Department of Education.

Student loan debt, by the way, is not dischargeable in bankruptcy.

The federal education department is concurrently working to develop more transparent, clearer-to-understand Financial Award Letters like the sample offered online by CFPB.

The sample form also can be used by the public to generate comments about the form itself and to respond to the CFPB's request for comments about student loans in general.

Along with getting answers to questions posed by Congress CFPB seeks information on several student loan tops:

Scope, use of private education loans

• How do families finance education, in addition to private loans -- tuition payment plans, credit cards, home equity lines of credit, 401(k) retirement funds, 529 plans, etc.?

• For students who do not exhaust their Federal Student Aid (FAFSA) options, before turning to private education loans, where do they get information that explains private loan choices?

Information about and shopping for private loans

• Where do students and families obtain information about private education loans and private lenders? What sources are most helpful and accurate? How effective are disclosures about loan terms and conditions? Do students adequately understand the terms and conditions of various financial options?

• How do students determine how much debt they'll need to acquire when selecting a school? Schools' financial aid budgets or other sources? What sources are available to help them consider their ability to repay the debt?

Institutional loans

• How heavy do schools pitch their own loans and how do those programs compare with non-school loans in terms of interest rates, ease of approval, underwriting criteria, repayment terms, and other factors?

• What types of schools most commonly offer their own private student loan programs and how are students selected for these loans (e.g., academic merit, financial need, recruitment, retention)?

• How well are private education loan repayment terms understood, when borrowers take out the loan, while attending school, at graduation, and when repayment begins?

• What voluntary steps or programs do schools offer to enhance students' awareness of their debt loads and ability to afford loan payments?

• How much does a student's debt load affect their undergraduate field of study, career choices after graduation and decisions to attend graduate school?

• Are students adequately informed of their rights as student loan borrowers. How do they learn about those rights?

• What financial education techniques and resources demonstrate effectiveness in helping borrowers avoid default on private education loans? Which alternative repayment plans are most effective in keeping borrowers out of default and why? Have private lenders adopted repayment program modifications in response to high unemployment among recent graduates in the wake of the financial crisis?

For more information see: "Request for Information Regarding Private Education Loans and Private Educational Lenders"

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