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Rohit Chopra should be ashamed of himself. |
Rohit Chopra, the Student Loan Ombudsman for the Consumer Financial Protection Bureau (CFPB), issued a report earlier this month on the status of distressed private student-loan borrowers. The report is so timid, so tepid, so lacking in real recommendations for reform that Chopra and Chopra's boss, CFPB Director Richard Cordray, should be ashamed of themselves.
Basically, Ombudsman Chopra's report analyzed more than 5,000 student loan complaints directed at private lenders. The report documents that many students who borrowed money from banks to attend college have been driven into default. Chopra's reported identified these problems:
- Borrowers who have trouble paying back their private loans receive little information from the banks about their options for modifying their loan terms.
- People who borrow from the banks often find that there are no loan-modification options available.
- Private lenders are sometimes willing to offer borrowers a temporary forbearance from making their loan payments, but these forbearances often only delay default. Moreover, borrowers sometimes have to pay enrollment fees or experience processing delays in order to get nothing more than temporary relief.
Chopra's report ends on a pathetic note. Although it professes to offer "new tools to help borrowers take action when they run into trouble [with private student loans]," the report offers nothing more than a sample letter "that consumers can edit and send to their student loan servicer to request lower monthly payments and information on available repayment plans." That's all the CFPB has to offer--a crummy form letter!
Chopra and the CFPB Understate the Harm Caused by the Private Student Loan Industry
Chopra and the CFPB vastly understate the harm done to student borrowers who take out loans from private lenders to finance their college educations.
First of all, many students are ignorant of the difference between private loans and loans obtained through the federal student-loan program. Federal loans give distressed borrowers access to economic hardship deferments, income-based repayment plans, and loan consolidation options. For the most part, these options are not available to people who borrow money from private lenders to finance their college studies. Moreover, federal student loans generally offer lower interest rates than private student loans.
Many students are so unsophisticated that they do not realize that they are taking out loans from private lenders rather than participating in the federal student loan program. Thus, students often pass up the opportunity to participate in the federal student loan program and fall into the clutches of private banks.
Second, unlike most federal student loan programs, private lenders generally require students to obtain co-signers for their student loans. In most cases, the co-signer is a student's parent or other relative. Parents who co-sign their children's private student loans become personally liable for the debt--all of it.
Third, students and their parents may not realize that private student loans,like federal student loans, cannot be discharged in bankruptcy absent a showing of undue hardship, which is very hard to establish in a bankruptcy court. Students who take out private loans and are unable to pay them back may see their parents dragged down into financial ruin if their parents are not able pay back the debt. In most cases, the parents will have no recourse to the bankruptcy courts.
The Federal Government Should Shut Down the Private Student-Loan Industry
The CFPB report is pathetic in terms of its advice to students and their families who find themselves unable to pay back their private student loans. All Cordray and Chopra could think to do about the rapacious private student-loan industry was draft a form letter that students can use to beg for mercy when they find themselves unable to make their loan payments.
Students don't need sample letters to deal with the private student-loan industry; they need effective relief from private student-loans that many students did not fully understand when they signed the loan documents.
What needs to be done?
Congress needs to repeal the 2005 amendment to the Bankruptcy Code that has made it almost impossible for student borrowers and their co-signers (usually parents) to discharge their private loans in bankruptcy.
If Congress would take this simple step, the private student-loan industry would almost immediately shut down, which would be a good thing. The banks are happy to loan students money so long as students' parents co-sign the loans and bankruptcy relief is unavailable. But if private student loans could be discharged in bankruptcy like any other unsecured debt, the banks would get out of the student-loan business in a hurry.
In the meantime, Rohit Chopra, Rich Cordray and the CFPB need to issue dire warnings to college students and their families not to take out private loans to attend college. Such loans may make sense for people who are enrolling in expensive but high-quality professional programs in law or medicine. But low-income students have no business taking out student loans from banks and other private lenders. Too often, taking out a private student loan leads to financial disaster not only for the student but for the student's parents as well.
Mr. Chopra and Mr. Cordray are fully aware of the harm being caused by private student-loan financiers. “Struggling private student loan borrowers are finding themselves out
of luck and out of options," Mr. Cordray acknowledged. Unfortunately, Mr. Chopra, Mr. Cordray, and the CFPB do not have the courage to propose effective reforms.
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Mr. Cordray should be ashamed of himself too. |
References
CFPB Report Finds Distressed Private Student Loan Borrowers Driven Into Default. Consumer Financial Protection Bureau, October 16, 2014.