Perhaps with the Obama administration’s “Making Home Affordable” plan in mind, the CFPB announced last week that it was taking the first step to develop a “student loan affordability plan” by issuing a Notice and Request for Information. The CFPB plans to use the information gathered from the RFI “to explore more detailed recommendations to policymakers in order to facilitate greater repayment affordability of private student loans.” Comments are due by
April 8, 2013.
Alleged difficulties faced by private student loan borrowers in negotiating affordable repayment plans have been a frequent topic of comment by CFPB officials who have directed blame at lenders and servicers. Private student loan default rates, which were highlighted in the July 2012 student loan report submitted to Congress by the CFPB and Department of Education, have also received much attention. Such alleged difficulties and default rates resulted in a recommendation from the CFPB’s Student Loan Ombudsman in his October 2012 report that Congress “identify opportunities to spur the availability of loan modification and refinance options.” Rather than wait for Congress to identify those opportunities, it appears the CFPB plans to recommend its own “student loan affordability plan” in what presumably will be a further report to Congress based on the RFI.
Based on the CFPB’s comments in the press release announcing the RFI and in the RFI’s background discussion, the CFPB’s plan is likely to represent an effort to impose on private student loans various repayment features of federal student loans. In those comments, the CFPB observed that unlike borrowers with federal student loans, private student loan borrowers generally do not have long-term forbearance, income-based repayment, or rehabilitation options if they default. This suggests that the CFPB may call for refinance opportunities through new federal loan programs, incentives to lenders and servicers to modify loans, and/or substantive limits on the terms of private student loans, such as required income-based repayment terms and default-related restrictions.
The topics on which the RFI seeks information include the following:
•The scope of borrower hardship—what are the primary drivers of private student loan distress and steps taken by distressed borrowers to stay current;
•Options for borrowers with hardships—what options exist for borrowers to lower monthly payments, how lenders evaluate borrower eligibility for such options, and what is the incidence of re-default;
•Examples of successful loan modification programs—what features of such programs could apply to a “student loan affordable program;
•The ability of existing servicing platforms to process loan modifications at scale—what differences between student loan and residential mortgage servicing must be considered in creating a “student loan affordable program”;
•How an affordability program sponsored by a public entity might mitigate moral hazard and selection bias; and
•The spillover effects of student debt on the ability of consumer’s to obtain other types of credit such as mortgage and auto loans and economic well-being.
While the CFPB’s RFI and the CFPB’s rhetoric noted above make it sound as if they are seeking solutions to a problem of epic proportions, we would be remiss if we failed to point out that not everyone agrees. For a contrary perspective, see The Myth of the Student Loan Crisis by Nicole Allan and Derek Thompson in the March issue of The Atlantic.