CFPB Readies New Student Loan Rules

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 CFPB, Student Loan, Debt

Source: Reuters

It began with the way credit card companies went about the business of serving consumers. Soon, the focus shifted to mortgage providers and now, the Consumer Financial Protection Bureau is preparing to put into place new guidelines student loan providers will be required to adhere to.

It’s specific and far more thorough than anything the sector has faced in the past. Specifically, the CFPB proposed rules mean non-bank servicers of student loans will face strict supervision and audits. By non-bank, CFPB is referring to the payment processors who work on behalf of the lenders. Not only that, but any of these companies that annually handle more than one million accounts (not dollars) will be classified differently and in those instances, not only will they be required to adhere to the same rules, but they will also fall under the supervision of CFPB. That said, the total number of those companies is less than ten. Those few companies oversee more than 50 million student loan accounts.

Federal and Private Loans

These rules would be applicable to the companies that handle both private and/or federal student loans. Remember – for the first time in history, the American student loan debt has surpassed the $1 trillion mark. And it grows every day. Also, for the first time ever, student loan debt has surpassed credit card debt. Clearly, better regulation could put into place better systems that would benefit not only the students and their families, but the industry as a whole.

Our proposed rule would bring new oversight to this market and give the Bureau visibility into the complete cycle of student loan debt, from origination through servicing to debt collection and credit reporting,

said CFPB Director Richard Cordray. He goes on to explain the authority would protect consumers from what he refers to as “potential dead ends”.

Ideally, it will monitor the lenders while also reviewing any complaints or grievances filed by consumers regarding their rights, loan terms or other potential problems. Cordray explains that the decision to borrow money to further one’s education has a “profound impact” on families, whether it’s the parents who take the loans out to cover their childrens’ educations or the college students themselves who are looking to support themselves while also covering the costs of college. Because so many Americans are struggling financially, it’s a difficult decision to come to and it becomes that much more crucial to ensure predatory lenders aren’t in the mix. These are the same consumers who are recovering from the recession and who are likely carrying credit card debt, mortgages, medical bills and other monthly expenses. Not only that, but the stagnant unemployment throws yet another wrench into the game.

Servicer v. Lenders

Servicers and lenders aren’t necessarily synonymous. Worse, borrowers have no power in determining who ultimately carries the loan. This confusion makes it easy for some companies to avoid accountability. Cordray says complaints have come in that say borrowers can’t find answers to their questions and they report a lack of customer service,

So students can find themselves at a dead end – stuck without a clear path forward,

Cordray said.

And now, lawmakers are eying student loans; specifically, federally subsidized Stafford college loans. They are considering tacking interest rates onto these loans based on current market indicators. These would include Treasury notes and it have big repercussions – especially the variable rates that are often not stable. It could also mean that more students and their families are eligible for the loans. It would provide a much needed expansion for these specific loan types.

Avoiding Disaster…Until Now

Last summer, Congress put into place a 3.4 percent rate on these federally backed student loans and was able to avoid doubling the rates. That was a temporary fix, though and the same quagmire will present itself yet again this summer. At risk are 7 million student loans. As an example, freshmen who borrow the maximum $3,500 for the year in Stafford loans will save $700 to $1,700 on average over the life of the loan, depending on repayment terms.

Hearings were held last week with the U.S. House Education and the Workforce Committee. Representatives heard from various experts, each with their own long term solutions. One recommendation included eligibility for the loans be tightened because of the lower rate. Justin Draeger, president of the National Assn of Student Federal Aid Administrators reminded lawmakers that for two years in a row, they’ve found themselves stressing at the last minute to address the deadline for keeping the rates low,

This is the second year in a row policymakers have been left scrambling to keep interest rates down for subsidized Stafford Loan borrowers. Last year we kept interest rates from doubling from 3.4 percent to 6.8 percent for these borrowers at a cost of roughly $6 billion.

He referred to it as a “piecemeal patch” that meant some students were without the same benefits as other students. He likened it to “robbing Peter to pay Paul”.

In the meantime, NASFAA continues to push for a more definitive and permanent solution, one that’s based on the markets and which would mean variable interest rates. Another example could be to base the rate on the 10 year Treasury note rate with an additional across the board three percent. This would allow for a more fixed monthly amount and further would equate to lower rates even when the markets are unpredictable.

Open the Possibilities

Ultimately, the goal remains to ensure students wishing to attend college to further their educations are given a means to do so. Whether it’s through grants or student loans, access to funding is crucial. With the potential for CFPB to step up to the plate, it could be the solution is nearer than many even realize.

Based on the actions from the CFPB in recent years, do you think it’s the right agency to oversee student loans? Have any thoughts on how to ensure financing is kept available for today’s families wishing to send their kids to college? Let us hear from you and what you think the best avenue would be.

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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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