Private Student Loans to be Governed by the Government

Man with magnifying glass looking at money
The Consumer Financial Protection Bureau (CFPB) made a series of recent announcements hinting that the private student loan market may start to see more government oversight.

According to Bloomberg, the CFPB has likened private student loans to the “subprime” loan of the college financing world.

But not all private student loan borrowers are subprime, nor do they need to be treated as such.

“Certain low-risk borrowers probably don’t need to be paying such high rates and paying those high rates is leading them to delay a lot of economic milestones, which have really large consequences and ripple effects for the entire economy, including the housing market,” said Rohit Chopra, the CFPB’s student loan ombudsman.

Those consequences occur when students who are riddled by tens of thousands of dollars in college-related debt refuse to pursue common “rites of passage,” including moving out of mom and dad’s, getting married and buying homes.

While the $1 trillion in outstanding student loan debt includes federally-backed financing as well, it’s the private sector that’s hitting students with the highest and most volatile interest rates.

“During the financial crisis, we had seen the Fed try and ensure that capital markets were functioning and used certain authorities to make sure that asset-backed securities, whose underlying assets were private student loans, were able to be made,” Chopra told Bloomberg in an interview. “It seems that there are some places where the market is not working. You have a lot of responsible borrowers paying very high interest for several years now, but they’re unable to refinance that debt.”

While regulation of the private student loan industry appears to be imminent, an actual long-term solution has yet to be found.

“We can’t begin to [regulate] this all at the federal level,” said Education Secretary Arne Duncan on the Bloomberg radio program. “We need states to continue to invest, and we saw 40 states cut funding to higher education this past year. You need universities to keep costs down, [to] keep tuition down in tough economic times.”