Student Lending Fixes Needed, CFPB & DOE Say

Posted by Marissa Anema Monday, July 23, 2012 10:53:00 AM

 

WASHINGTON – Revising the TILA to clarify the definition of "private student loan" is one of many steps that Congress could take to improve the educational lending market for students, families, schools, and financial institutions, CFPB Director Richard Cordray said in a recent report.

The recommendation is one of many made in a joint CFPB/Department of Education (DOE) private student lending industry report, mandated by Dodd-Frank, released last week.

The report found that loosened lending standards between 2005 and 2007 made private student loans risky for many consumers, and led to many students borrowing more than they needed to finance their educational expenses. The private student loan market grew to $20 billion in 2008 and private student loan default rates "have spiked significantly" since that time. More than 850,000 individual student loans are in default, the report noted. This adds up to $8 billion in unpaid loans.

While federal student loan terms are usually more favorable than private loan terms, the CFPB/DOE examination found that many students did not exhaust their federal Stafford Loan limits before they took out private student loans. Borrowers also lacked an understanding of key differences between private and federal student loans.

Congress could require lenders to work more directly with educational institutions during the student loan origination process. The report suggested that lenders verify that the loan amount requested by a student does not exceed the student's needs, and said private lenders could also be required to examine a borrower's federal loan eligibility before they take out a student loan.

Schools and lenders could also do more to inform borrowers of student loan costs before they take them out, and Congress could also examine recent bankruptcy law changes that make student loans non-dischargeable debt in bankruptcy proceedings.

CUNA estimates that around 300 credit unions currently offer students loans to their members. Credit unions also provide financial education and seminars relating to student lending generally, and encourage students to attend. The CUStudentLoans.org website also provides extensive financial education regarding student lending, through both written information and webinars. The site is powered by Fynanz, a CUNA Strategic Services provider.

The CFPB/DOE report is available here.

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