Risky lending practices are to blame for the increase in private student loan defaults and Congress needs to do something about it, says the CFPB.
Borrowers have defaulted on more than 850,000 private student loans totaling more than $8.1 billion -and the amount is expected to rise, according to a report released today by the Consumer Financial Protection Bureau, which blames the problem on aggressive lending practices.
“Our findings reveal that students were yet another group of consumers that were hurt by the boom and bust of the financial crisis,” Richard Cordray, director of the CFPB, said in a statement. “Too many student loan borrowers were given loans they could not afford and sometimes for more money than they needed. They are now overwhelmed by debt and regret the decisions that they made.”
Outstanding private student loan debt now exceeds $150 billion, according to the CFPB. Many of the risker loans were written between 2005 and 2007, an era of loose underwriting standards, said Cordray. During this time, lenders marketed loans directly to students and were more likely to originate loans to borrowers with lower credit scores than they had previously. The financial crisis has reversed these trends, said Cordray, but “borrowers who took out loans at the height of the boom are still suffering from those excesses.”
Many young Americans are overwhelmed by the levels of debt that they owe, according to Millionaire Corner research, and cite student loans as the single most significant source of debt. “Without clear guidance or a good way to compare the pros and cons of different loan options, many students got in over their heads in debt,” said Cordray. Most vulnerable to these trends were students attending the nation’s for-profit colleges. (Older Americans are also impacted by educational loans and the rising costs of college, according to Millionaire Corner research.)
Complicating the scenario, are high unemployment rates for recent college grads and the special status enjoyed by private student loans that makes the loans “nearly impossible to discharge,” said Cordray. Monthly payments on all educational loans exceeds 25 percent of income for one-in-ten recent college grads, according to the CFPB .
Corday, along with U.S. Education Secretary Arne Duncan, is asking Congress to enhance consumer protections in the private student loan market. Among other things, they are asking legislators to reevaluate current bankruptcy discharge standards for private student loans.