NYT: Driving Students Into Default
Driving Student Borrowers Into Default
People who pay for college with federal student loans can avoid default when they fall on hard times by making lower payments — or no payments at all — until they recover financially. Borrowers who take out private student loans from banks and other institutions typically have no such option. When they lose their jobs or suffer other financial setbacks, they have little choice but to default, which, in turn, damages their credit histories and ability to borrow for other purposes or even to find a job.
Federal regulators and members of Congress have been pressing private lenders to adopt flexible payment plans like those available through the federal loan system to no avail, according to an alarming report released last month by the student loan ombudsman at the Consumer Financial Protection Bureau. Congress may have to step in and require them to do so.
Private student lenders are not required to disclose loan activity. But according to one estimate based on federal data, about 80 percent of students who graduated with heavy debt ($40,000 or more) just when the recession started had private loans. Jobs were hard to find, and the housing crisis had destroyed the home equity that parents might have tapped to help out. And some students who had planned on a modified payment plan turned out to be ineligible for that assistance. Complaints piled up. According to the ombudsman’s report, the Consumer Financial Protection Bureau collected 5,300 complaints about private lenders during the 12-month period that ended Sept. 30 — a 38 percent increase from the same period a year earlier. Borrowers who sought lower payments were told that the payments were set and nothing could be done. In some cases, borrowers were advised to default and try to negotiate a deal with a collection agency.
Congress helped cause this problem in 2005 when it rushed through without debate a provision that makes private student loan debt virtually impossible to discharge through the bankruptcy process. (The same is true of federal loans.) Since then, lenders have had no incentive to work out arrangements with borrowers who want to pay but don’t have the means to do so under the original terms of the loan. Now it’s time for Congress to fix that error either by rescinding the bankruptcy provision or requiring lenders to create clearly advertised flexible payment plans in exchange for retaining it.
Beyond that, Congress should require of private lenders what it already requires of mortgage services, which must respond in a timely way to requests for a modified payment schedule. The aim is to help delinquent borrowers find a way to meet their obligations. Student borrowers should have the same chance.