Helping Private Loan Borrowers

A new report to Congress on the private student loan market tells a story that by now is familiar: complaints from borrowers about repayments, servicing and bankruptcy, and comparisons to the mortgage markets. The report, the second this year from the recently established Consumer Financial Protection Bureau, urges Congress to act to improve student loan servicing and provide private student loan borrowers with more flexibility.

The consumer protection bureau has focused on private student loans, as well as other financial products not historically regulated by other federal agencies, since it opened last year. Beginning in March, the agency began accepting complaints about private student loans, eventually synthesizing the nearly 2,000 it received into a report for Congress.

The new report, published today, comes from the bureau’s student loan ombudsman, Rohit Chopra. Chopra examines the private student loan market place largely as described by the thousands of borrowers who wrote in with complaints, taking a narrower view of the industry than the bureau did as a whole in its report earlier this year. While the July report focused on regulating the private loan industry, suggesting changes such as involving colleges more closely in students’ borrowing or possibly allowing loans to be discharged in bankruptcy, Chopra suggests more incremental changes that could help borrowers who have already taken out the loans.

Private student loans make up only about 15 percent of student loans nationwide; the federal government, through its various subsidized and unsubsidized loan programs, is by far a bigger lender. Private loan volume has been dropping since 2009, a change attributed both to new regulations and to tighter financial markets during the recession. Still, private loans often are singled out for criticism because they lack protections such as flexible repayment plans for borrowers in distress.

Chopra said his report, which represents only his opinion, not the bureau’s, found “surprises, runarounds and dead ends” for private loan borrowers in distress. Because the report is based on complaints from borrowers who went to the trouble to write to the bureau, a group necessarily skewed toward those with bad experiences with private lending, it was not representative, Chopra wrote. Still, he went on to say, the report “can help to illustrate where there is a mismatch between borrower expectations and actual service delivered.”

While private loans lack some of the benefits of federal loans, many of the complaints in Chopra’s report dealt with issues that apply to both types. The majority of the complaints -- 65 percent -- were about loan repayment issues, particularly servicing. A common theme was borrowers who tried to act responsibly, attempting to lock in a lower interest rate when their credit improved or negotiate a new payment plan when they fell behind, only to run into difficulty with loan servicers. Other troubles with servicers, including mistakes in crediting payments to accounts or difficulty processing paperwork, also featured prominently.

Federal loans have had their share of servicing problems recently, including glitches that have briefly revealed borrowers’ personal data and problems rehabilitating loans for borrowers in default. Other complaints -- such as debt collectors’ practices -- have been raised about federal loans as well.

The bureau doesn’t plan to look into complaints about federal loans as deeply, at least for now. “We’ll continue to study the market for all types of loans and make sure consumer laws are being followed,” Chopra said. “We’ll look to see how we can make sure all student loan borrowers are protected.”

Chopra’s recommendations, unlike the bureau’s, skirted whether borrowers should be able to discharge student loans in bankruptcy. (While the bureau stopped short of recommending such a step in July, its overview of bankruptcy protection for private loans strongly implied that Congress should allow a bankruptcy discharge.)

Instead, the ombudsman called on Congress to find ways to help borrowers modify their loans to lower their payments. And he drew a parallel between mortgage servicing and student loans, saying the Treasury Department and the Education Department (as well as the financial protection bureau itself) should study whether recent changes to mortgage servicing, part of a $25 billion settlement with big banks, could help the student loan industry as well.