We wrote an open letter last year to private student lenders urging them to stop making excuses and start helping borrowers. Unfortunately, not much has changed.
There have been improvements for newer borrowers. Most new private loan products are better, but let’s not get carried away congratulating the lenders. The predatory loans they made for years helped crash the economy. During the boom years, the focus was on quick profits. Over time, however, the defects in these expensive, unsustainable products became clear and the loans began to fail. The industry hit a wall, exposing the risks of making unsecured, expensive loans to borrowers with little or no ability to repay.
Most subprime private student lenders have either left the business since the credit crisis or moved on and created new products. Although these lenders may have moved on from the worst hits to their bottom lines, most borrowers continue to face collection long after the loans are charged off. Each charge-off represents an individual who cannot repay a debt and who may be facing aggressive collection tactics. These student borrowers generally face numerous collection calls, lawsuits, and negative entries on their credit reports that can last for extended periods of time.
We see and hear the human toll from the low-income borrowers we represent. Some are so traumatized by collection calls and skyrocketing debt loads that they vow never to go back to school. These choices not only impact these individuals and their families, but also harm our society.
Senator Elizabeth Warren expressed her outrage about the continuing harm to borrowers in a Senate hearing last week. She called attention to a recent CNN article highlighting the plight of parents who co-signed their daughter’s student loan. When their daughter tragically died, the parents were stuck with a $200,000 debt (the loans were originally $100,000 according to the article). In a series of questions to Consumer Bankers Association President and CEO Richard Hunt, Senator Warren first described how banks lobbied to make it nearly impossible for borrowers to discharge private student loans in bankruptcy and then asked, “”What can these borrowers do?” Mr. Hunt replied with a few examples of lender relief programs, including death and disability cancellations. These programs are helpful, but too few and far between and offered only on a case by case basis.
Financially distressed borrowers stuck with unaffordable, toxic loans need more comprehensive relief. Senator Warren also noted that the federal regulators have specifically stated that private student lenders have flexibilty to modify loans. In fact, the agencies encouraged lenders to work with private student loan borrowers in July 2013. Why isn’t this happening on a larger scale?
First and foremost, Congress must restore bankruptcy rights for all student loan borrowers. Beyond that, as a starting place for reform, it’s important to review the Consumer Financial Protection Bureau’s summary of responses to its request for comments about relief for existing student loan borrowers. These options are taken from the more than 28,000 comments the agency received. Policymakers should pay close attention to the CFPB report with its focus on the potential impact of student debt burdens and ways to spur affordable loan repayment options. NCLC provided our perspectives in these comments. We believe that much more must be done to provide assistance for struggling borrowers. The guiding principles of these policies should be:
1. Affordability for borrowers.
2. Preservation of borrower protections.
3. Enforceability.
4. Efficiency and Scale. The program must be designed to reach as many as possible of the borrowers in or at risk of default, and
5. Fairness. The program must not be a bailout or giveaway to lenders.
In the meantime, not much is happening to create real relief and the lenders keep suing financially distressed borrowers. To really close the books on these toxic loans, the lenders should create an amnesty program and provide full relief for these borrowers. The lenders have moved on, it’s time to let struggling borrowers move on as well.
