This post was written by Amanda M. Modar, Assistant Director for Public Policy, and Katie Berger, Public Policy Assistant.
To finance the increasing costs of college, students and families have resorted to private student loans, defined as student loans originated outside of the U.S. Department of Education’s loan programs (Stafford Loans, Perkins Loans, PLUS Loans) by commercial entities. Private student loans are one of the riskiest, most expensive ways to pay for college, with variable interest rates and conditions less favorable to borrowers than federally-backed loans.
According to the College Board, private student loans made up 25 percent of total education loan volume in 2007-08. While that is predicted to be the peak of private student loan borrowing, a recent report from the Project on Student Debt notes that lender competition has increased and more lenders are entering the market to get a slice of the student loan pie.
Since its founding in 1937, NACAC has promoted ethical standards for counseling students in the transition from high school to college, including advocating for the protection of students against deceptive lending practices. Last summer, NACAC successfully advocated for the passage of the Wall Street Reform and Consumer Financial Protection Act of 2010, which established the Consumer Financial Protection Bureau (CFPB).
The new federal agency has regulatory and enforcement authority over all private student lenders, including banks with more than $10 billion in deposits and all non-banks, such as for-profit education companies that offer their own student loans. The CFPB is working to educate consumers to protect against abusive practices, enforce federal consumer financial laws, and study financial markets and service providers.
The creation of the CFPB represents a significant opportunity for improving college financing options and protecting students in the United States. The CFPB Private Education Loan Ombudsman, yet to be appointed, will be responsible for collecting and analyzing complaints filed against private lenders which will, hopefully, be used to inform enforcement and regulatory efforts. The agency is also charged with providing recommendations to the U.S. Congress regarding consumer protection legislation. Among the first of these should be a recommendation that the federal government extend bankruptcy protections to borrowers of private student loans. Unlike most other debt, student loan debt cannot be discharged in bankruptcy, adding significantly to the struggles of students who cannot afford to keep up with their, often substantial, private loan payments.
Finally, the CFPB should provide resources for, and promote the provision of, financial literacy education for students transitioning to postsecondary education. It is essential that, as students make one of the most important investments of their lives, they are informed of their financial aid options and the risks associated with private loans. For more information, see NACAC’s Private Student Loans page and Student Protection Agenda for the 112th Congress.