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

The Rats Are Deserting A Sinking Ship: Banks Are Getting Out of the Private Student Loan Business

JP Morgan Chase Bank recently announced that it is getting out of the student loan business.  The bank said it was responding to a trend by students toward taking out federally back student loans, but in fact it has been scaling back its student loan program for several years.  This year the JP Morgan Chase only loaned about $200 million, down dramatically from 2008, when the bank loaned an astonishing

I'm getting out of the student loan biz

$6.9 billion to student borrowers (according to USA Today).

There was a time when the banks considered student loans to be very profitable. In 2008, they loaned a total of $20 billion. The student-loan market must have looked very lucrative at the time.  After all, a majority of these loans have a co-signer--usually a student's parent; so mom and pop are on the hook for them.  And the banks got legislation through Congress in 2005 that made private student loans almost impossible to discharge in bankruptcy.

In fact, for several years prior to 2008, private loan volume increased every year such that one commentator predicted that private student loans would exceed the federal student loan program by 2030.

But the banks are backing out of the private student loan business. After 2008, loan volume began dropping precipitously and only amounted to $6 billion in 2011.

Private student loans generally have higher interest rates and less favorable terms than loans offered through the federal student loan program. So who took out these loans?  The usual suspects. According to a report to the Senate Banking Committee, 46 percent of undergraduate students in four-year programs at for-profit colleges took out private loans in 2008 compared to only 14 percent of comparable undergraduates at public colleges.

The Project on Student Debt also found that students attending for-profit colleges were most likely to take out private loans and that African American students were more likely to take out a private bank loan than other students.

Why are the private banks reducing their student loan portfolios?  My guess is that the banks are bailing out of the student loan business because it has become unprofitable. In spite of the fact that these loans are almost impossible to discharge in bankruptcy and a majority of them are co-signed, the banks are still seeing a high default rate in their private loans.

In short, the rats are leaving a sinking ship. They are retreating from a sector that is no longer profitable.


References

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. Accesible at: http://projectonstudentdebt.org/files/pub/private_loan_facts_trends.pdf

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.