An Earful on Private Loans

WASHINGTON -- Late last year, a newly formed agency designed to protect consumers in the financial marketplace asked student loan borrowers to write in about their experiences with private student loans.

The Consumer Financial Protection Bureau got an earful: almost 2,000 comments from student loan borrowers, higher education organizations, nonprofit lenders and banks arrived over the next six months. The thousands of pages of comments, most submitted through the bureau’s website, paint a picture of borrowers confused by the student loan marketplace, struggling with high levels of debt and pleading for help from the government.

The complaints aren’t new: indebted borrowers have told similar stories online and in the media for months, as student debt rose first to the forefront of the Occupy movement, then began to play a role in the campaign for the White House. But the comments to the Consumer Financial Protection Bureau, unlike those on blogs and petitions about debt forgiveness, are addressed to a government agency that has said it wants to address some of the concerns through regulations.

Still, the comments don’t provide a clear picture of what, if anything, the bureau, charged with compiling a report to Congress on the state of the private student lending industry, might recommend in response.

The majority of borrowers who wrote to the agency said they have tens of thousands of dollars' -- if not six figures' -- worth of debt, either because they borrowed large amounts to attend college or because the interest on their private loans has capitalized over time. In comments ranging from a few short sentences to long paragraphs, borrowers of all ages told of similar situations: taking out federal and private loans to attend college, then discovering that their monthly payments were in the hundreds of dollars and jobs were hard to find.

“Because my sights were set on completing my educational program, I didn’t think very long about loan repayment,” one borrower, a 68-year-old retiree still paying off a student loan from a graduate program, wrote. “I was optimistic about my job prospects and felt confident about my ability to repay the loan."

Many borrowers are confused about the difference between federal and private loans. Until 2010, many Stafford student loans were made by banks but guaranteed by the federal government through the Federal Family Education Loan Program. Many borrowers referred to “Sallie Mae loans” without specifying whether the loans were federal or private -- the lender formerly issued both, although it now makes only private loans. The confusion is a stumbling block for borrowers and regulators alike: borrowers might be unaware of options like income-based repayment available only on federal loans, while regulators must untangle complaints about collection practices and customer service disputes that could apply to either government or private lenders.

Over and over, borrowers said they were trying to live the American dream by pursuing an education; many said they want to repay their loans, but can’t afford the full monthly payment. In comments, they asked for lower interest rates; more flexibility in repayment plans, such as the income-based options available on federal loans; tighter regulations on debt collection practice; more information when the loans are taken out about monthly payments; and the ability to discharge private student loans in bankruptcy.

“How is it that I can go to Vegas and go into massive debt and have that erased by bankruptcy, but by furthering my education I've shot myself in the foot financially?” one borrower wrote.

Congress took steps to regulate private loans more closely in the 2008 reauthorization of the Higher Education Act, requiring more disclosure on interest rates, fees and estimated monthly payments on new loans. The Consumer Financial Protection Bureau more recently created a financial aid “shopping sheet," which would include students’ estimated monthly payments for both federal and private loans.

Many borrowers said that information would have been helpful. “I knew my interest rates and how much I was taking out each semester in a lump sum, but I wish there had been a tool to show me what that translated to as a monthly payment,” wrote one borrower, who graduated in 2010 with $70,000 in private student loan debt. “I think it would have been less of a shock, and I might have been more inclined to try to pay some out of pocket at the time.”

Whether the borrowers’ problems have realistic fixes is uncertain. The bureau could tighten regulations on debt collectors, an issue that has been raised repeatedly in recent weeks. Many consumer groups have called for college certification of private student loans, which would require colleges to verify the cost of attendance, tuition and fees before students could borrow. (Certification would also alert financial aid offices that a student is considering a private loan, giving financial aid counselors a chance to offer advice or alternatives before the promissory note is signed.)

In a detailed response to the financial protection bureau’s questions, Sallie Mae, the largest private student lender, endorsed college certification as a protection against over-borrowing.

Other issues -- like the interest rates on both federal and private student loans, which many said were too high, as well as the rising cost of college -- are out of the agency’s purview. And while allowing private student loans to be discharged in bankruptcy has many supporters, including many consumer advocates, it’s opposed by lenders, who argue that it would restrict student loans to borrowers who already have a good credit record.

The agency’s report to Congress, Education Secretary Arne Duncan and Treasury Secretary Timothy Geithner on private student loans is expected this summer. “Once we figure out all of the cracks in the system, we’ll work with our government partners, industry, and schools to address them,” Rohit Chopra, the bureau’s student loan ombudsman, wrote in a blog post about the comments.

Chopra acknowledged that any new regulations might not help borrowers who are suffering now. And even in the long run, new regulations, disclosures and cautions will have to compete with the allure of easy money -- as even some borrowers admitted.

“Most of us are aware and savvy,” wrote one borrower, who took out $2,500 for graduate school and later regretted the experience, “but we see the need for money immediately so that we can accomplish our goals rather than look at the long-term effects of taking out these types of loans.”