Since federal student loans can be at least partially controlled by Congress and the Department of Education, there is a tendency for lawmakers to concern themselves strictly with PLUS, Stafford and other federal loans. However, private student loan lending grew faster than federal lending from the mid-90s until 2008. This would have continued had it not been for the sub-prime mortgage crisis that began in 2007 and still continues to affect loan availability today. Many of those loans now are either placing financial stress on many students and graduates trying to stay afloat or they are already in default.
Help may soon be available though. The Federal Consumer Financial Protection Bureau (CFPB) has just released a new report with recommendations to address concerns solicited and gathered since October of 2012. Over 28,000 comments were collected and analyzed for this report. While the CFPB did determine that the smaller amount of private student debt will not have the same level of impact as the federal student loan amount or the sub-prime crisis, it does need to be dealt with quickly.
These loan concerns are coming not just from the borrowers, but from the financial institutions and federal regulators as well. This massive amount of debt; more than $8 billion in defaulted private loans alone, has a crushing effect on the economy. Large amounts of unpaid debt restrict the banks from making further loans and not just for students. Loans for startup businesses, capital to expand existing businesses and home loans are also much harder to qualify for even when they are offered.Although there have been some positive signs in the economy such as the Dow breaking 15,000 points recently; many financial institutions are still in defense mode protecting what assets they have. Likewise, many former students are delaying purchasing homes, their first new car or even investing in their retirement accounts in order to maintain their student loan payments.
Right now, private student loans cannot be consolidated with federal student loans into the Obama Loan Forgiveness program. The interest rate for private loans is much higher than what is available for Stafford and other federal loan programs. The term length for private loans is generally set at 10 years while most federal loans can extend out to as far as 25 years. The report published by the CFPB has two primary recommendations to change both of these factors and allow easier refinancing.
The first suggestion in the CFPB’s report is to establish a way to restructure the various private loan plans. Many of the current private loan payments are as high as 25 percent of a borrower’s total monthly income. This payment does not take into account inflation, reduced job market or even basic needs such as rent, utilities and food. The two recommendations are to either allow borrowers to convert their private loan to a federal loan or create a new program that sets down rules for borrowers and lending institutions to consolidate loans along the lines of the Income Based Repayment Plans currently available to students and graduates with federal student loans.
Under Income Based Repayment, the monthly payment amount will not exceed 15 percent of a borrower’s discretionary income. That is, income remaining after rent, utilities and food expenses has been deducted. Family size also figures into determining the monthly payment. This payment can be adjusted every year depending on changes in family size and income. The length of time a person would have to repay the loan would be extended from 10 years to as long as 25 years.
The second point from the CFPB was to suggest establishing a central refinance market for private student loans. This would allow for banks, credit unions and a range of other potential lenders to compete for customers, lowering rates and providing better loan terms. These providers would also be given special access to capital to secure these refinanced loans as long as they meet federal regulations. This was the more popular of the suggested changes.
Either of these options is going to involve major rewriting of banking regulations to allow for federal restructuring and/or takeover of private loans. For the financial health of so many families and the continued growth of the national economy, it can and needs to be accomplished. Contact your Representatives and Senators and ask them to make this a priority. Please continue to visit us here at www.studentdebtrelief.us for the latest information.