As we predicted at last week’s meeting of the National Council of Higher Education Resources’ Private Student Loan Committee, the CFPB field hearing held last Wednesday in Miami was devoted to student loan affordability. In fact, prior to the hearing, the CFPB released a report with just that title and the hearing was clearly intended to serve as a backdrop for the report. In addition to remarks by Director Cordray discussing the “potential domino effect” of student loan debt on the economy and “potential policy and market-based solutions to help struggling borrowers,” the hearing featured comments by student loan borrowers and their parents.
In the report, the CFPB analyzes the potential impact of student loan debt, recent actions of policymakers in the student loan market, and “potential affordable repayment options” for consideration by policymakers and market participants. For its analysis, the report drew on the more than 28,000 comments the CFPB received in response to the Notice and Request for Information it published in February 2013 seeking input on affordable repayment options for borrowers with existing private student loans.
In the report’s discussion of the potential impact of student loan debt, the CFPB does not distinguish between private and federal student loans. However, the CFPB’s discussion of possible “solutions” is limited to how payments on private student loans can be made more affordable.
The report’s key observations include:
Student loan debt could be inhibiting young Americans from forming new households or becoming first-time homebuyers. Other potential impacts of student loan
debt could be: (1) reduced access to small business credit and discouragement of new business formation; (2) inadequate retirement savings for younger Americans and reduced retirement security for older Americans; (3) a shortage of primary care providers and qualified teachers as a result of medical students choosing more lucrative specialties and teachers choosing more lucrative fields; and (4) decreased interest in living in rural areas among young consumers.
Steps are needed to facilitate more refinancing of private student loan borrowers. A “refinance option” might include a mechanism to allow providers of refinance products with access to affordable capital, such as a credit facility that provides non-recourse loans secured by qualifying refinanced student loans or awarding credit under the Community Reinvestment Act and encouraging state and local governments to use tax-exempt financing.
A possible “road to recovery” program for restructuring private student loans could involve the establishment of a program administrator (either a government agency or its representative) to whom borrowers seeking a restructured loan would be directed. Lenders and servicers participating in the program could amend payment terms using a published, step-by-step process in which monthly payments are reduced through interest rate reductions, term extensions or other concessions to reach a target debt-to-income ratio.
A “credit clean slate” program could include public/private loss-sharing on restructured loans that default and, for borrowers who have defaulted but are successfully making payments on restructured loans, changes in what lenders or services report to consumer reporting agencies to allow such borrowers to repair the damage to their credit reports.
Whether the CFPB will seek legislative and regulatory changes to implement these programs remains to be seen.