Next to a home, a college education can be the most expensive purchase one makes in a lifetime. And like many people who took out mortgage loans before the Great Recession, a growing number of borrowers are struggling to pay off student loans that were originated by private lenders in the mid-2000s.
According to a report on private student loans released by the Consumer Financial Protection Bureau, some private student lenders misled borrowers about their loan terms as well as their federal student loan options, and since 2008, student loan debt has increased and default rates have escalated. The report lists the total amount of outstanding private student loan debt in the U.S. as more than $150 billion and cumulative defaults on private student loans as more than $8 billion.
Among several recommendations the CFPB and Secretary of Education made to Congress in the report is to consider allowing private student loans to be dischargeable in bankruptcy. Since 2005, the government has not permitted discharging private student loans in bankruptcy except in cases of undue hardship, the CFPB said.
The CFPB did not respond to Credit Union Times requests for an interview, but two credit unions, a student lending CUSO and a student lending technology vendor said credit unions–newcomers to the private student lending market–are not to blame for student loan borrowers’ mounting debt or lack of knowledge. Instead, they said credit unions have worked to relieve borrowers of their debt and educate them about how to pay for college since day one.
“Greed can do harmful things,” said Jim Holt, vice president of sales operations for student lending CUSO Credit Union Student Choice, in response to the report’s findings. “Many lenders back in the mid-2000s did not care about the financial well-being of the borrower nor the performance of the loan, as they were off-loading on the ABS markets. It’s from these ashes that we launched our solution to help members find affordable financing and appropriately manage risk for credit unions.”
The report also states that between 2005 and 2007, private student lenders reduced their involvement with schools and lent to borrowers with low credit scores. After 2008, they began to tighten their credit standards and require co-signers. The CFPB, which was launched last year by Congress and only has regulatory authority over three large credit unions, recently gathered feedback from consumers on private student loans and published nearly 2,000 comments on its website.
A co-signer and school certification are two requirements that can help prevent a private student loan default, said Holt, who noted that the CUSO’s credit union partners only make school certified loans and 97% of Credit Union Student Choice’s undergraduate portfolio carries a co-signer. For school certified loans, schools verify a borrower’s enrollment and the cost of his or her education, which helps prevent the student from over-borrowing.
“During the boom period, many lenders believed an easy way to drive up balances, portfolio growth and profitability was to circumvent the financial aid offices and their expertise,” he said. “Doing so is a huge mistake because it overburdens the borrower and leads to high defaults. If you collaborate with the school’s financial aid office, they can help educate borrowers on responsible financing.”
Vince Passione, CEO for financial technology company Fynanz, the provider of the cuStudentLoans.org private student loan marketplace, said he believes the CFPB provides an accurate description of the pre-2008 private student loan market and that credit unions entered the industry with much higher standards. Fynanz’ more than 150 credit union partners require school certification on all student loans and a creditworthy co-signer on about 90% of loans, as well as follow sound underwriting practices to protect their borrowers and themselves, he said.
“Credit unions are new entrants into the private student loan industry and have been good students of avoiding the errors made by their predecessors,” Passione said. “Given that credit unions focus on providing the best service to their members, they have and continue to be supportive of any best practices that provide additional transparency into the financial aid process.”
Big banks, which tended to hold private student loans for only a few days before turning them over to the secondary market, were most likely the culprits of the poor lending practices referred to by the CFPB, said Alice Stevens, chief operating officer for the Wall, N.J.-based, $195.8 million First Financial FCU and chair for cuStudentLoans LLC. First Financial FCU provides the cuScholar Private Student Loan and cuGrad Private Student Loan Consolidation products through a partnership with Fynanz.
“We knew that private student lending programs had not been done fairly in the past, and that influenced how we set up our product,” Stevens said. “We went into it with a credit union-like attitude, which is to be as transparent as possible.”
Stevens said she believes that if Congress permits private student loans to be dischargeable in bankruptcy, those loans would become riskier for lenders and potentially more expensive for consumers.
Education plays a key role in First Financial FCU’s private student loan program–the credit union teaches borrowers about the differences between federal and private student loans and ensures they receive all the federal aid they can before applying for a private loan, Stevens said.
The $1.6 billion, Fairfax, Va.-based Apple FCU also makes education a top priority in its private student lending program, said Eric Stegner, student services coordinator for Apple FCU. The credit union is a Credit Union Student Choice partner and serves an education-based membership field.
Stegner hosts financial aid events at local high schools and always approaches them from an informational standpoint, not a sales standpoint, he explained. Through its education program, the credit union teaches student borrowers to exhaust all federal aid options first, determine the actual cost of their education before applying for a private student loan and understand all their options for federal student loan repayment.
All of Apple FCU’s private student loans require a minimum credit score of 680 from the borrower or co-signer, which helps protect the credit union from risk, Stegner said.
“We help reduce student loan debt by starting at the beginning, and making sure they go with federal options first. If Apple’s loan makes sense for them, I’ll recommend Apple’s loan, but I let them know that they have options.”
When asked for his opinion on the private student loan bankruptcy debate, Stegner said he understands both viewpoints.
“Student loans are a bit risky to begin with. You’re lending to someone without a credit history or a job,” he said. “Lenders might be more at ease knowing private student loans are not dischargeable in bankruptcy because they know they’ll get the money back. But on the other hand, some borrowers are struggling to make their payments.”
The CFPB and Secretary of Education’s recommendations to Congress regarding private student lending regulation also include requiring school certification and ensuring schools and lenders work proactively to protect and inform private student loan borrowers.