Flexible Re-Payment & Refinancing Needed For Private Loan Borrowers
April 5, 2013
WASHINGTON, D.C. – Consumers Union, the policy and advocacy arm of Consumer Reports, urged the Consumer Financial Protection Bureau today to work with private student lenders to make flexible repayment plans and refinancing options available to borrowers. Consumers Union’s proposals are in response to the CFPB’s request for public comment on the affordability of private student loans.
“More and more students are graduating with staggering debt and finding it difficult to repay their loans in today’s economy,” said Suzanne Martindale, staff attorney for Consumers Union. “Private student loans can be particularly costly and don’t offer the same repayment options that come with federal loans. The CFPB can bring relief to struggling borrowers by working with private lenders to develop income-based repayment plans and options for refinancing loans at lower rates.”
Of the $1 trillion in outstanding student loans, private loans account for roughly $150 billion of the market. Private student loans can come with variable interest rates that may be significantly higher than federal loans.
Once in repayment, the differences between federal and private loans become stark. For federal loan borrowers struggling with underemployment, low wages or other setbacks, relief is available in the form of deferments, forbearances, or flexible repayment plans such as income-based repayment (IBR) and the Pay-As-You-Earn program. However, a private loan borrower does not have the legal right to such options.
To make matters worse, if the borrower defaults on a private student loan and spirals toward bankruptcy, that loan will be treated differently than any other unsecured forms of credit. Private student loans cannot be automatically discharged in bankruptcy. In order to obtain relief, a student loan borrower filing for bankruptcy must also initiate a separate proceeding and demonstrate that he or she will face “undue hardship” if the student loan is not discharged. This vague standard established by Congress as part of the 2005 amendments to the Bankruptcy Code has proven very difficult to meet.
To assist struggling private student loan borrowers, Consumers Union urged two key reforms:
- Flexible Re-Payment: Private lenders should offer income-based repayment plans to borrowers. Borrowers who demonstrate financial hardship, due to high debt balances and modest wages, should be allowed to repay a reasonable percentage of their income in order to stay current.
- Refinancing Options: Lenders should develop refinancing options for private student loan borrowers. When borrowers demonstrate a pattern of responsible behavior, they should have the opportunity to shop around for lower interest rates as they become available.
These recommendations are part of a broader set of student loan reforms that Consumers Union has urged Congress and regulators to adopt. For more information see Consumers Union’s Seven Principles for Fair Student Lending.