Surprise, Surpise! Student Loan Ombudsman Reports Problems in Private Student Loan Industry

 I admit that I have been pleasantly surprised by the quality of the reports coming out of the Student Loan Ombudsman's office. Rohit Chopra, the Student Loan Ombudsman for the Consumer Financial Protection Bureau, is doing good work.  Mr. Chopra's reports on student loans are clear, concise, and helpful.

Mr. Chopra's latest report, released this week, focuses on complaints against the private student loan industry.  About 13.7 million people have outstanding balances on private student loans, which total well over $100 billion.  Students who attend for-profit colleges are most likely to take out private student loans. In 2008, almost half of all undergraduate students who attended a for-profit college (46 percent) had at least one private student loan.

Last year, the Consumer Financial Protection Bureau received 3,800 complaints against private student-loan lenders, which is a highly concentrated industry. Almost all the complaints were made against eight private lenders, including Wells Fargo, JP Morgan Chase, Citibank, and KeyBank.  Almost half of the complaints were made against one lender--Sallie Mae.

Here are some of the chief complaints that student-loan borrowers reported:

• Borrowers had trouble paying off their loans early.  They had difficulty getting an accurate payoff number. And when they attempted to pay their loans off early by making additional payments, these additional payments were often not properly credited to them.

• Late fees were charged even when borrowers paid their monthly payments on time.

• When borrowers ran into financial trouble and only made partial payments, these payments were credited to maximize the penalties against them.

A few comments. First, some private student-loan lenders are getting out of the business, and that is a good thing.  For Example, JP Morgan Chase, which once loaned billions of dollars a year to student borrowers, announced last month that it shutting down its private student-loan operation.

Second, there is no valid reason why private student-loan borrowers should be having the problems that the CFPB reported. People with home mortgages have no difficulty paying off their loans early by making extra payments and they have no difficulty getting an early payoff amount.  So why are student-loan borrowers having a problem?  My guess is that the banking industry runs its student-loan operations to maximize profits and has no interest in helping their borrowers pay off their loans early.

Third--and most importantly, the banking industry got its toadies in Congress to amend the Bankruptcy Code in 2005 to make private student loans as difficult to discharge in bankruptcy as federal student loans.  Several respected commentators have recommended that this provision be repealed.

If Congress would repeal its 2005 Bankruptcy Code provision and allow distressed student-loan borrowers to discharge their private student loans in bankruptcy like any other unsecured debt, the private student-loan industry would disappear almost immediately.

The banks are in this business because it is very profitable, and their borrowers have almost no access to bankruptcy or to effective consumer protections.  Students who attend for-profit colleges are most vulnerable to these voracious institutions. I say it is time to shut this pernicious industry down.

References

Rohit Chopra. Annual Report on the CFPB Student Loan Ombudsman. Washington, DC: Consumer Financial Protection Bureau. October 16, 2013. Accessible at: http://www.consumerfinance.gov/reports/annual-report-of-the-cfpb-student-loan-ombudsman/

Alan Collinge. Commentary of the Day-May 2, 2012: What Congress Can do to Fix the Student Loan Crisis. Posted on Irascible Professor Website. accessible at: http://irascibleprofessor.com/comments-05-02-12.htm

Kimberly Hefling. Lender problems target student loan complaints. The Baton Rouge) Advocate, October 17, 2013, p. 8A.
JP Morgan Chase to stop making student loans. USA Today, September 5, 2013. Accessible at:
http://www.usatoday.com/story/money/personalfinance/2013/09/05/jpmorgan-chase-student-loans/2772509/

JP Morgan Chase to stop making student loans. USA Today, September 5, 2013. Accessible at:
http://www.usatoday.com/story/money/personalfinance/2013/09/05/jpmorgan-chase-student-loans/2772509/

Private Student Loans. Finaid web site. Accessible at:  http://www.finaid.org/loans/privatestudentloans.phtml

Private Student Loans. Report to Report to the Senate Committee on Banking, Housing, and Urban Affairs, the Senate Committee on Health, Education, Labor, and Pensions, the House of Representatives Committee on Financial Services, and the House of Representatives Committee on
Education and the Workforce. August 29, 2012. Accessible at: http://files.consumerfinance.gov/f/201207_cfpb_Reports_Private-Student-Loans.pdf

Private Loans: Facts and Trends. Report updated in July 2011. Project on Student Debt. Accessible at: http://projectonstudentdebt.org/files/pub/private_loan_facts_trends.pdf

A Closer (and Closer) Look at the Trillion: Consumer Financial Protection Bureau Releases Useful Report on Magnitude of the Student Loan Crisis

Earlier this month, Rohit Chopra, the Student Loan Ombudsman for the Consumer Financial Protection Bureau (CFPA), issued a very useful report that moves us closer to figuring out what the real student-loan default rate is.

As I have tirelessly (some would say tiresomely) pointed out, the Department of Education's three-year default rate--13.4 percent--only measures the number of people who default on their federal student loans within three years after their repayment obligations begin.   Many people default after the three-window that DOE measures, and these people are not counted in the default rate.

 Moreover, millions of people aren't making payments on their student loans because they received deferments or forbearances that temporarily relieve them of their obligation to make loan payments. These people aren't counted in the official default rate either.  Without question, many of these people won't pay back their loans, due in part to the fact that their loan balances are getting bigger because interest on these loans continues to accrue while the loans are in deferred or forbearance status.

The recent CFPB report tells us how many million people have loans in forbearance or deferred status, and this information gives us a clearer picture of the student loan crisis.

First of all, CFPB reported that 50 million people have federal student loans with outstanding balances.  That's right--50 million! 

CFPB also reported that 6.5 million people have loans in default--about 13 percent of those 50 million debtors.  That figure roughly correlates with DOE's official three-year default rate of 13.4 percent.

But CFPB also reports that 3.4 million people have obtained forbearances on their loans and about 5.3 million people have obtained deferments.   In other words, 8.9 million people have been temporarily excused from making payments on their student loans.

When we add the number of people in default to the number of people who aren't making payments due to deferments or forbearances, we have a total of 15.4 million people who are not making loan payments--30 percent of the people who have outstanding student loans.

Of course some of the people who obtained deferments or forbearances will eventually start making their payments and will ultimately pay off their loans.  But I believe--and who can disagree--that most of those 8.9 million people who have temporary exemptions from making their loan payments will never pay off their loans.

Why do I believe that? First, as I just stated, most people with deferments or forbearances are seeing their loan balances grow because interest is accruing during the time they are not making loan payments.  The longer these people wait to begin making loan payments, the harder it will be for them to ever pay off their loans.

Second, as Senator Tom Harkin's report on for-profit colleges documented, a lot of for-profit institutions are actively urging many of their former students to apply for economic hardship deferments in order to keep their institutional default rates down. If it were not for these college's "default management" activities, many more students who borrowed money to attend for-profit colleges would be formally categorized as defaulters. 

CFPB has performed a useful service by reporting the number of people who are not making payments on their loans due to deferments or forbearances.  It should now be clear to everyone that the percentage of people who will ultimately default on their student loans is at least double DOE's official default rate.  The true default rate must be at least 25 percent--and for students who attended for-profit institutions, the default rate is probably closer to 50 percent. 

This state of affairs cannot go on forever.  Our economy simply cannot afford to operate a huge federal program that ruins the lives of a quarter of the people who participate. 

References

Rohit Chopra. A closer look at the trillion. Consumer Financial Protection Bureau, August 5, 2013.  Accessible at: http://www.consumerfinance.gov/blog/a-closer-look-at-the-trillion/

Richard Cordray, New Director of Consumer Financial Protection Bureau, is Clueless About the Student Loan Crisis

CFPB's Richard Cordray: Clueless

First, the good news. The nation's Consumer Financial Protection Bureau has a new director--Richard Cordray; and he is worried about the college loan crisis.  Now the bad news. Mr. Cordray is apparently clueless about how to address this problem.

In an interview with USA Today, Mr. Cordray made clear that the CFPB is concerned about young people who have taken on high levels of debt to attend college.  "Their lives are effectively ruined or certainly potentially held back for many years," Cordray told USA Today. According to a CFPB report, many young people have been forced to postpone buying a home, starting a business or having a family by their massive student loans.

So what does Mr. Corday suggest we do about it?  More education! 

That's right, the CFPB is encouraging better financial education for young college students, including the use of its "Know Before You Owe" online financial aid shopping tool. 

Thanks, Richie, for warning people to be more careful when they take out student loans. 

And what is Mr. Cordray's other suggestion for dealing with the student loan crisis? He advises more borrowers to take advantage of the government's extended loan repayment plans.  Instead of paying loans off in ten years, more debtors should pay a percentage of their income toward paying off their loans over a period of 20 or 25 years.  In other words, he has bought into the sharecropper solution to the student loan crisis.  Just pay a portion of your income to the government over a majority of your working life. 

Thanks again, Richie. That's really helpful.

Not surprisingly, the CFPB's advice fits exactly with the higher education industry's stance on the student loan crisis.  This gigantic problem can be fixed, the colleges' trade organizations say, by giving students more information about borrowing money to attend college and then encouraging students to enroll in long-term income-based repayment plans to pay off their debt.

This stance relieves colleges and universities from reining in their costs, and it relieves the government from any responsibility for effectively regulating the for-profit college sector, where student-loan abuses are most prevalent.

Frankly, this country doesn't need a Consumer Financial Protection Bureau if it is just going to perpetuate the status quo and parrot the stance of the rapacious higher education industry.  If the CFPB is going to effectively address the student loan crisis, it should do these things:

1) Insist that the Department of Education accurately report the student loan default rate--the percentage of people who default over the life of the loan repayment period.  It should also insist on an accurate accounting of the people who are not making loan repayments because they obtained financial hardship deferments.

2) Advocate for amending the Bankruptcy Code to allow distressed student loan debtors to discharge their loans in bankruptcy under the same terms available for discharging other nonsecured debt.

3) Insist on legislation to stop the government from garnishing Social Security checks of elderly student-loan debtors who defaulted on their loans.

And of course there are a host of other things the CFPB can do to address the student-loan crisis besides service a "Know Before You Owe" project. 

But perhaps I'm being unfair to the CFPB. After all, it also operates a complaint department.  If you have a complaint about your student loans,  just call the CFPB's 800 number: 1-800-TUF-LUCK. 

References

Consumer Financial Protection Bureau. Know Before You Owe: Student Loan Project. Accessible at: http://www.consumerfinance.gov/students/knowbeforeyouowe/

Jayne O'Donnell. Consumer protection chief talks student loans. USA Today, August 5, 2013, p. 3B.

Like Rock and Roll, The Federal Student Loan Program Will Never Die. But's Let Try to Make It Smaller

Rock and Roll is here to stay.

It will never die.

It was meant to be that way.

Though I don't know why.

                                                                                 Danny & the Juniors

As Danny and the Juniors so eloquently reminded us, some American phenomena are perpetual and will never die. Rock and Roll falls in this category, and so does the Federal Student Loan Program.

 According to Rohit Chopra, the Student Loan Ombudsman for the Consumer Financial Protection Bureau, total student-loan indebtedness under the  Federal Student Loan Program grew by 20 percent in just 18 months!   Total indebtedness now tops out at $ 1.01 trillion.   In addition, total student-loan indebtedness to private lenders is $165 billion.  So--total student-loan debt now approaches $1.2 trillion. 
 

By the way, how would you like to have Rohit Chopra's job--Student Loan Ombudsman for the Consumer Financial Protection Bureau?  It must be something like a medic's position in a World War II concentration camp--handing out aspirins to inmates slated for oblivion.

Turn out the lights. The party's over.

I'm a realist. I know the federal student loan program cannot be dismantled.  The American higher education community absolutely depends on it, and most for-profit colleges could not exist without it.  The for-profit colleges have powerful lobbyists, and we will never get the for-profit colleges out of the feeding trough.
 

Nevertheless, let's at least try to impose some level of decency on this train wreck of public policy.

First of all, let's treat the wounded.   Let's stop garnishing the Social Security checks of elderly student-loan debtors who  defaulted on their loans.  Let's give student-loan debtors reasonable access to the bankruptcy courts.  Let's make all student loans subject to state consumer-protection laws so injured students can sue college and universities who entice people to take out student loans through fraud or misrepresentation.
 

Second, let's try to stop the growth rate in student-loan indebtedness by encouraging low-income students to attend community colleges that have low tuition rates instead of borrowing money to attend more prestigious institutions. Because you know what? If you are poor you shouldn't be borrowing money to attend Harvard; and besides you probably wouldn't like it anyway.
 

Third, let's crack down on colleges and universities that raise their tuition every year because they can't control their costs.  It is a scandal that university presidents like Ohio State University's Gordon Gee and New York University's John Sexton make more than $1 million dollars a year (far more actually) while college students across the country are borrowing more and more money every year to attend college.
 

American college students are tapped out.  According to Ombudsman Chopra's remarks, people with student-loan debt are now less likely than other people to have home mortgages or outstanding auto loans.  Why?  Because many people are now so burdened with college-loan debt that they can't participate in the consumer economy--they can't buy homes or purchase cars.
 

For years now, colleges and universities have been singing a variation of Rock and Roll is Here to Stay; they think the student loan program was meant to be this way and will never die. But if we don't reform this program soon, higher education will be singing a different tune, this one by Willie Nelson.

"Turn out the lights. The party's over."

 

 

References

Rohit Chopra. Student debt swells, federal loans now top a trillion. Excerpted remarks from speech given on July 17, 2013.  Accessible at: http://www.consumerfinance.gov/speeches/student-debt-swells-federal-loans-now-top-a-trillion/



The Private Student Loan Scandal: More Worthless Advice From the New York Times (which cares so much about the little guy)

You think the federal student loan program is a mess? You should take a look at the private student loan program.  In contrast to federal student loans, which have fixed interest rates, private loans (the loans students take out from private banks and other financial institutions) often have variable interest rates.  The federal loan program--for all its many faults--at least allows students to obtain economic hardship deferments and offers an income-based repayment program (IBRP).  Private student-loan lenders are not obligated to show an overstressed debtor any mercy--and often they do not. Many students are not even aware of the difference between federal student loans and private loans and are shocked to learn that the terms and conditions of their private loans are more onerous than the federal program.

The New York Times--that tireless champion of the little guy--made this tepid suggestion for reforming the private student-loan program on today's editorial page (October 25, 2012).

The federal government needs to open up refinancing and debt relief opportunities for [private student-loan borrowers], as it did for some mortgage holders. The [Consumer Financial Protection Bureau] should also set national standards for loan servicers to require clear disclosure of conditions . . . and prompt resolution of customer requests for information. And borrowers who might be eligible for federal student loans should be advised to examine that option before plunging headlong into private debt.

Yep. A little more federal regulation will straighten out the private student loan scandal.  That's like saying Mussolini would have been a little nicer if he had only gotten the right medication.

If we want to stop the abuses in the private student-loan industry, we only need to do one thing: allow insolvent private student-loan debtors to discharge their loans in bankruptcy like any other non-secured debt.  They could do that until 2005, when the banking industry persuaded Congress to pass legislation to make it almost impossible to discharge a private student loan in bankruptcy.

If the banks knew their student-loan borrowers could file bankruptcy and discharge their loans, they would have an incentive to work with overstressed borrowers.  In fact, they might get out of the student-loan business altogether.

The Times' latest suggestion for reforming the massive student-loan debacle is typically tepid, not coming close to the heart of the problem. But what do you expect from a newspaper that makes its money selling advertising space to such luxury firms as Versace, Saks Fifth Avenue, and Armani? Do you think the Times really cares about some poor smuck who got in over his head by taking out a private student loan from Wells Fargo?

References

Editorial (2012, October 25). Student Debt Debacles. New York Times, p. A24.
   

Dear New York Times: Your Suggestion for Controlling Abuse in the Private Student-Loan Industry is Pathetic

Some people think all the problems of the world will be solved when people are better informed. That seems to be the view of the New York Times--the nation's nanny.

Today the Times--in other tepid and timid editorial--calls for better disclosure for private student loans.  The Times is responding to the recent report by the Consumer Financial Protection Bureau.   The report found that 40 percent of students who took out private loans were eligible for less costly federal loans.

 The Times supports a pending bill "that would require colleges and lenders to thoroughly explain borrowing options to students." In addition, the Times reports, the proposed law will "prevent unnecessary borrowing by requiring lenders to check with colleges to determine how much money students are eligible to receive."

Blah, blah, blah.

Here are the central facts about private student loans.

1. Like federal student loans, private student loans are almost impossible to discharge in bankruptcy.
2. Ninety percent of private student loans are issued to student borrowers with a co-signor. In other words,  parents are often co-signing their children's student loans and obligate themselves to pay them back if their child defaults.
3. According to the CFPB report (p. 64), 850,000 private student loans--an astonishing number--are in default.

Congress can do one simple thing to protect private student-loan borrowers; it can amend the Bankruptcy Code to make private student loans dischargeable in bankruptcy.  

References

Editorial, "Better Disclosure for Private Loans," New York Times, July 26,2012.