Private Student Loans Cause More Issues Than Federal Loans

Young distressed student
The problems surrounding the mortgage crisis have transferred to another important market: student loans.

According to research by the Consumer Financial Protection Bureau (CFPB), not only are students growing an unfathomable number of debts, but they are finding it difficult to repay their loans.

In an annual report by the Student Loan Ombudsman, about 2,900 private student loan complaints were received and analyzed.

Private student loan borrowers complained of three major issues in the report.

  1. Unexpected surprises: Many recent graduates reported difficulty in finding out a total amount owed. Borrowers did not receive adequate information when they began repaying their loans, and were hit by unexpected costs and rules.
  2. Runaround from lenders: Borrowers state they have difficulty getting the items promised to them when they signed up for a loan. Whether it is loan repayment options or certain interest rates, the lending companies are reportedly failing to meet their promises.
  3. Failure to negotiate: For some borrowers, they requested options for deferrals, forbearance or interest-rate changes, but to no avail.
The author of the study, CFPB Student Loan Ombudsman Rohit Chopra, said the stories provided by borrowers bear an “uncanny resemblance to problematic practices uncovered in the mortgage servicing business.”

“Consumers deserve clarity, not chaos and confusion,” he said.

Private student loans and federal student loans total over $1 trillion — a number growing by the minute. American consumers currently owe more than $150 billion in outstanding private student loans. Although the number is significantly less than the federal student loan number of $864 billion, the private funding sector is more impactful on a student’s credit history. Private student loans have higher interest rates which can fluctuate severely. These loans are not offered with an income-based repayment options, and they will not be considered for the new Pay As You Earn plan, which offers income-based repayment and loan forgiveness after 20 years of on-time payments.

According to earlier research by the CFPB, private student loans burgeoned over the last decade. The organization of the private loan market has changed entirely. In a similar fashion to the years leading up to the mortgage crisis, banks lent out more student loans than needed. Unsure of the entire lending process, students accepted more loans than were necessary for their education. Additionally, many student borrowers, or even parental co-signers, accepted private student loans without knowledge of how much they would owe in the near future.

CFPB Director Richard Cordray stated in a press release that students were yet another consumer group affected by the “boom and bust” of the financial crisis.

“Too many student loan borrowers are struggling to pay off private student loans that they did not understand and cannot afford,” he said.

Wall Street was fueled by new ways to increase profit, so lending standards were relaxed. Additionally, an increase in marketing was targeted towards the young students themselves, many of them only 17 or 18 years old.

“Subprime-style lending went to college and now students are paying the price,” said U.S. Education Secretary Arne Duncan. “We still have some work to do to ensure that students who take out private student loans have the same kinds of protections offered by federal loans.”

Under new regulations of income-based repayment, federal student loans will likely become more regulated. When students run out of federal options, they will resort to using private loans. Although the mountain of debt is not reducing, the impact of both federal and private student loans is generally understood as a growing concern, which needs immediate resolution.

“Moving forward, we must do our best to leave the next generation in a better place than we are today, rather than buried in a mountain of debt,” Cordray said.