I read with interest Justin Draeger’s (President, National Association of Student Financial Aid Administrators or NASFAA) recent post in the New York Times entitled “More Protection is Needed for Private Student Loans.” In the piece, Mr. Draeger notes that private student loans are “on the rise again” due to lower fixed rate options from private lenders that undercut federal loans. He’s concerned that there may be a return to the “Wild West” (do we really need to return to the inflammatory language of state Attorneys General trying to score political points?) of the old private education market and supports the Consumer Finance Protection Bureau’s (CFPB) recommendations to improve student loan protections. Finally, he calls for standardized repayment processes and proper disclosure of information to borrowers.
I’m not sure why this piece is coming out now. The reality is that private student loans make up a small part of the student loan market. Given the current state of credit underwriting and the effective absence of a securitization market, it’s doubtful that we will see a return to private loans making up 26% of the market. It will be awhile before it grows to more than 10%. Further, he seems concerned that the rise in private loans will be due to the offering of fixed rates lower than the federal loan programs. This is, in fact, a good thing. Borrowers who receive fixed rates on private loans have a strong cosigner (usually a parent) on the loan. These are families who understand credit and have a strong financial background. Families such as these don’t need taxpayer supported federal loans. They can make it on their own. It is the groups who qualify for rates above the federal loan rates that should look to federal first.
Further, the federal student loan program is dominant today. If Mr. Draeger should be concerned about anything it’s the growth of the Parent Loan for Undergraduate Students (PLUS) program which is funding families with far less stringent underwriting than was used in the most ill-advised days of Private Student Loans (or FFEL’s) heyday. The program has seen significant growth since the advent of 100% Direct Lending and there are even signs of potential abuse. Further, the PLUS loan program has none of the vaunted borrower protections afforded to students in the Federal Direct Stafford Program. Of all the student loan products today, PLUS Loans pose the greatest risk to borrowers and taxpayers.
I’m also confused by the call for more disclosure in private loans. Currently private student loan lenders are required to provide borrowers with three notices containing 18 disclosure items at three different stages of the private loan application process. I won’t argue that those disclosures are effective, much less read, but adding on seems nonsensical. If we want to help students make better decisions on private loans, time would be far better spent easing restrictions on the ability of college and university financial aid offices to evaluate and recommend private loan programs to their students. Current regulations make it difficult for schools to do this. Without guidance from the financial aid professionals who make up his organization, 18 year old students are left to navigate the consumer credit waters with no direction and without the benefit of the professional’s experience. This is where student borrowers can truly be helped.
I will agree with Mr. Draeger on the need to help borrowers who are facing large student loan debt that includes private student loans. He notes that the CFPB is well positioned to lead that process. As I’ve outlined before, the fastest way to help these borrowers is for the CFPB to push the OCC and other bank regulators to relax certain requirements on lenders in regards to making accommodations for private student loan borrowers. Contrary to popular belief, lenders don’t want these loans to charge off. They actually would rather have a borrower successfully repay their loans. It’s time for the CFPB and OCC to make this a reality while Congress makes decisions on what will happen with bankruptcy.
Finally, all this discussion on private student loans cannot be had without discussing what drives all student loan debt, college costs. Again, Mr. Draeger’s constituency is the best place on campus to help all university stakeholders understand the impact of ever increasing tuition and fees on students. We have a student debt problem because we have a college cost problem. When we deal with that, we will ease the student loan burden for all.