CFPB Encourages a Jumpstart for Student Loan Refinances

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Jumpstart for Student Loan Refinances

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The massive $1.2 trillion that’s owed in student loan debt includes a small portion that’s considered private loans. Unfortunately, these are the financial sources for those with troubled credit or those already carrying high amounts of debt. Now, though, CFPB is encouraging a better understanding for student loan refinances.

The government watchdog group says lawmakers have a role to play and that by jumpstarting it could make a big difference for millions of families. Specifically, it says by using public funds to finance private-public partnerships with lenders, it could help those already financially struggling and could also help prevent another crisis in this sector like the mortgage meltdown of 2008.

Public Comment

A while ago, CFPB announced it would be seeking public comment on ways to improve the borrowing process when it comes to student loans and more importantly, student loan refinances. The comments came in droves to the Consumer Financial Protection Bureau. This week, the proposal was delivered via Rohit Chopra, who is the assistant director and student loan ombudsman for the U.S. CFPB. He delivered it to the Senate Committee on Banking, Housing, and Urban Affairs.

Student Loan Refinances

As part of his delivery, he testified,

Many of those who submitted to the Bureau’s request for information noted that if lenders had more incentive to work with borrowers trapped in debt, both could benefit,

Chopra said.

Policymakers might look to provide a path forward for those borrowers, creating a transparent step-by-step process that leads to affordable payment terms where monthly payments can match a reasonable debt-to-income ratio and repayment of the loans can be more affordable.

In 2008 and 2009, most graduates left college with $40,000 in debt. And 81 percent of those obligations were private student loans. Most go into college with the expectation that they’ll have some debt at graduation. There was a time when that wasn’t the case, though.

In fact, two decades ago, it was nearly unheard of for college graduates to enter the working world with either credit card debt or student loan debt. In 2011, a full 66 percent of students who graduated owed the government or their banks money for those educations. Most of those debit-ridden graduates are able to justify the debt, telling themselves,

It’s expensive now, but I’ll be able to pay it back when I get out,

Of course, the job market is incredibly weak and most are unable to find positions in their careers.

There are now other worries. If a solution isn’t found to keep the interest rates on these loans at 3.4 percent, those with new loans will soon be paying 6.8 percent.

Good News, Bad News

If there’s any good news, it’s that the vast majority of borrowers currently carrying student loan debt won’t be hit with the increased rates. On the other hand, new loans will take on those higher interest rates. For undergraduates who take out Direct Subsidized Loans, there will be some changes. The Congressional Budget Office estimates that there will be approximately 9.4 million Direct Subsidized Loans made in 2014, with a total value of over $28 billion. Currently, there are roughly 39 million borrowers with federal student loans. The CFPB also has a few programs, including its Repay Student Debt program and its Ask CFPB board.

Wondering which states had the worst ratios? You might be surprised at the results. The worst states in 2010 include (beginning with the worst) Vermont taking the top spot. On average, colleges in this state see their seniors leave with close to $29,000 in student loans, but they don’t earn more than a paltry $10,000 a year.

Tying for number 2 are New Hampshire and Iowa. Both graduate with $33,113 student loan debt, but can expect to earn as a salary in their first year after graduation just $38,000. In Indiana, their average student loan debt is $28,071 and they earn about $38,000 in their first year. That’s followed by Maine, whose students graduate with $26,500 in student loan debt and earn $35,000.

Market Efficiency

For these reasons, and many more, Chopra said that lawmakers should make this a priority and focus on efforts to “increase private capital participation and market efficiency”. Those might include loan restructuring efforts, even if it requires public funds or a division between private and public funds.

The student loan refinances could ease countless burdens, especially for those who, despite their struggles, have managed to maintain their payments. It could be that the loan is rewritten at different interest rates that are more in line with their credit profiles.

While that sounds reasonable, it’s significantly shortsighted. Many – and potentially even “most” – college students also have massive credit card debt and limited job opportunities. That means those credit profiles have likely taken a hit. It wouldn’t be a solution for many. These students apply for their student loans before they really even have any kind of credit profile, but when they get into college, they begin using credit cards and other financial products. It’s not that some are irresponsible (although there are those who are), it’s more about the lack of financial experience.

Credit Card Trends

None of this, of course, addresses the troubling credit card trends for college age consumers. Even with the 2010 CARD Act, which prohibits credit card approvals for those under the age of 21 unless they can prove the ability to repay the debt, there are still too many who are able to bypass those laws.

Eventually, the laws will catch up with what college students will be able to access in terms of credit cards, but student loans have always been accessible to these young adults.

It’s clear there are no easy answers, but with better efforts being made not only by the families, but CFPB and lawmakers, the more than $1 trillion in student loan debt can be resolved. What are your thoughts? Do you think it’s possible to bring down that massive number in this lifetime? If you were testifying in front of Congress, what would your recommendations include?

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About Author

David is a CPA and has spent the past decade as a financial adviser helping clients meet their fiscal objectives. With an appreciation for journalism, he has spent the past few years overseeing several financial columns as well as writing two previous finance blogs. He resides on the East Coast with his wife and two sons and has guided many through the recent recession while providing a no-nonsense approach to spending and saving.


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