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As the New York Times pointed out in a recent editorial, private student loans are very different from federal student loans. Students who take out federal student loans get a fixed interest rate, and they can apply for an economic hardship deferment if they run into financial difficulties. Private lenders often offer variable interest rates that allow monthly loan payments to adjust upward, and they usually don't have any process in place to assist financially distressed borrowers.
The CFPB collects hundreds of complaints each year from people who took out private student loans. In a recent analysis, the Bureau reported that some private student-loan borrowers were forced into default without warning even though they were current on their loan payments In particular, the CFPB documented that some student-loan borrowers who were making regular payments on their loans were forced to pay back the entire amount of their loans if a person who co-signed their loan died. Some student borrowers received notice from their lender that their loans were being called due at the same time they were mourning the loss of the parent or grandparent who had cosigned the student's college loan. Now that's crumby behavior.
And guess which private lender received the most complaints? Sallie Mae. The CFPB received 995 complaints about Sallie Mae between October 2013 and March 2014. That's a 50 percent jump over the previous measuring period.
And coming in second place for most number of complaints was JP Morgan Chase.
Issuing private loans is a particularly lucrative business for the banking industry. Why? First of all, in 2005, the banks got Congress to amend the bankruptcy laws to make private student loans almost impossible to discharge in bankruptcy.
Second, about 90 percent of these loans are co-signed--often by a parent or a grandparent. Co-signers stand jointly liable with the student borrower when it comes to paying off a private student loan. And co-signers--like the student borrowers themselves--cannot discharge a private student loan in bankruptcy except under very rare circumstances.
In its recent report, the CFPB practically begged the banks to be more compassionate to their student-loan debtors. Rohit Chopra, CFPB's Student Loan Ombudsman, pointed out that a student-loan borrower who had a bad experience with a bank would be less likely to use that bank for other banking matters. And, Chopra added, treating student-loan borrowers badly might hurt the banks' reputation. Yes--the CFPB's Student Loan Ombudsman actually expressed concern about the banks' reputation!
The New York Times, commenting on the CFPB's report, thinks more federal regulation is the way to deal with the rapacious private student-loan industry. "Federal regulators clearly have a lot to do to address what amounts to a student loan crisis," the Times editorialized. Regulators "can begin by preventing contracts that unfairly burden borrowers," the Times suggested and loan terms "should be clearly stated." And--the Times concluded, student-loan borrowers should be notified when their loans are at risk and borrowers in good standing should not be "shoved into default."
Personally, I don't give a damn about Sallie Mae's reputation or the reputation of the banks that have been mistreating private student-loan debtors. And I don't think another layer of regulation will make the banks behave more compassionately or more responsibly.
The way to deal with problems in the private student-loan industry is to shut this sleazy business down. And that can be easily done. All Congress needs to do is to repeal the 2005 law that made it exceedingly difficult for private student-loan debtors and their guarantors to discharge student loans in the bankruptcy courts.
If Sallie Mae, JP Morgan Chase, Wells Fargo and the other major players in the private student loan industry knew that distressed student-loan debtors could discharge their student loans in bankruptcy in the same way they could discharge other non-secured debts, they would get out of the student loan business in a hurry. And that is exactly what we should want them to do.
Rohit Chopra. Mid-year update on student loan complaints. Consumer Financial Protection Bureau, April 2014.
Editorial. Troubling Student Loans. New York Times, April 29, 2014, p. A20.