The ever-increasing national student loan debt is raising red flags as the Consumer Financial Protection Bureau released a report on student loan affordability last week.
The report was the result of 28,000 comments submitted from public colleges and universities, professional associations, housing finance experts, students and families solicited from a Request for Information Regarding an Initiative to Promote Student Loan Affordability in February.
“Today’s report warns of the potential domino effects on the economy of high student debt,” CFPB director Richard Cordray said in a press release.
According to the report, over 38 million student loan borrowers are holding more than $1.1 trillion in debt, with over $8 billion in defaulted private student loan balances as of the end of 2011.
The report listed some of the problems occurring as a result of unpaid student debt for recent graduates, including decreased homeownership, less confidence in starting up small businesses, increased retirement insecurity and primary healthcare shortage.
U.S. Secretary of Education Arne Duncan said in a press release that the report is a step toward confronting and ultimately addressing the various issues that arise from accumulating debt.
“While federal loans remain a student’s best option, the CFPB’s important work highlights that many students are struggling to repay debt from private lenders, identifies obstacles that hinder lenders from providing borrowers with more options to better manage their debt, and provides thoughtful options for addressing these challenges that deserve policymakers’ serious consideration,” Duncan said in the release.
University professors are active participants in the discussion on the potential crisis that growing debt could cause, as well as the nuances between public and private loans.
Donald Grimes, senior research specialist and economist at the University’s Institute for Research for Labor, Employment and the Economy, said federal review should be focusing on public rather than private loans.
“That’s where the big money is, that’s where the big debt is, something like 90 percent of the total (debt) is in federal loans,” Grimes said.
The role of private banks in student loans was diminished with the Federal Direct Loan Program, instituted in 2010, which offers the largest source of college financial assistance in the country through its programs. However, while the majority of students receive loans through public sources, the CFPB report cites that 81 percent of borrowers graduating with $40,000 or more in debt had private loans.
According to the University’s financial aid website, providers such as PNC Bank, Wells Fargo and Sallie Mae granted 10 or more loans to University students in the 2011-2012 year.
For students who have completed a Free Application for Federal Student Aid, federal loans are awarded based on need, while private loans require separate applications and are more dependent on credit, usually that of a co-signer or parent.
Grimes added that the government should avoid an interest rate increase — a hotly contested issue in Congress right now, as the interest rate on federal student loans are scheduled to double from 3.4 percent to 6.8 percent on July 1 —and should be aware of the overhang of the amount of debt on students and consider restructuring the way in which they decide who to grant loans to.
Under the current system, some borrowers are eligible to receive more loans than they can realistically afford to pay back. In 2008, 10 percent of private student loan recipients devoted more than 25 percent of their income to meet student loan repayment obligations, a figure which, according to the CFPB report, is presumed to have grown in recent years.
Grimes said the issue of student debt requires quick action by Congress and should be addressed simultaneously with the management of interest rate levels.
“That would be a good vehicle to sort of move this whole discussion forward about the student loan debt, what the appropriate role is, how much of a burden students should be expected to bear and what sort of risk tolerance the government should bear over the longer term,” he said.
The CFPB report calls for affordable restructuring of loans, borrower transparency, loss-sharing for loan defaults and repair of a borrower’s credit profile in cases of default.
While the report acknowledges the variety of obstacles in the way of creating an affordable student loan system, it aims to “help policymakers as they consider the best ways to facilitate the viability and economic participation of consumers facing heavy student debt burdens.”
Grimes said student debt will continue to be a major national issue until a sustainable, reasonable solution is set in place.
“Right now, we’ve got an open-ended spigot in terms of granting these loans, both in terms of the colleges and universities that qualify and the amount of money that’s going to these students.”