The Consumer Financial Protection Bureau announced last week that it would be looking into alternative options to make expensive private loan repayments more manageable for struggling students.
The CFPB’s announcement comes just two months after the Department of Education announced its Pay As You Earn student loan repayment plan, which will cap monthly payments for Federal Direct Student Loans at 10 percent of discretionary income. The CFPB’s initiative targets private, rather than federal, student loans.
“Too many private student loan borrowers are struggling with unwieldy debt that prevents them from climbing the economic ladder,” CFPB director Richard Cordray said in a statement. “We will be analyzing plans for policymakers to consider that might help avoid a repeat of the mortgage meltdown for today’s student loan borrowers.”
Cordray and Secretary of Education Arne Duncan submitted a report to Congress last July that showed there are more than $8 billion in defaulted private student loan balances. The report also noted that because private loan repayment options are less flexible than federal ones, borrowers are having a more difficult time paying these loans off.
The CFPB says it’s beginning to gather information on the student loan burdens, the options available for students to lower monthly loan payments, examples of alternative payment programs in other markets and “the most effective mechanisms for communicating with distressed borrowers.”
Pam Fowler, the executive director of the University’s Office of Financial Aid, said in an e-mail interview that the CFPB’s intentions are identical to that of the Pay As You Earn program, but stressed that both programs are extremely important for the many students that have taken out loans.
“There is so much information out there about college, the cost of college and student debt, that it would make most students think twice or three times about going to college at all—and that would be the true tragedy here,” Fowler wrote.
Fowler said effective communication with borrowers is essential for successful loan repayment, and the source of such a message is especially critical.
“If (the message) comes from the government, I fear students who are in trouble will think it is not a helpful message but a punitive one and ignore it,” Fowler said. “The message has to come from someone viewed as non-threatening by the student and I doubt that is the government.”