Guidance on affordable private student loans

Many student borrowers struggle to repay their loans for a variety of reasons: the jobs they take after graduation don’t pay enough to cover monthly loan payments, sudden illnesses or emergencies put a strain on their finances, or their loans were set up to fail with predatory terms and exorbitant costs.

Students who pay for their education with federal loans can take advantage of income-driven repayment plans, which adjust monthly payments to affordable levels, if they cannot afford their standard payments. Private student borrowers have fewer options, however—unlike the federal government, private lenders are not required to modify students’ loans to make them affordable. The CFPB found that private student lenders offer borrowers little help to avoid default.

In response, the CFPB and the prudential banking regulators issued guidance last week encouraging private student lenders to offer more repayment options to borrowers. The guidance clarifies that private student lenders can offer loans with variable monthly payments. According to the regulators, lenders should:

·         Avoid negative amortization and balloon payments

·         Avoid sudden increases in monthly payments

·         Adjust monthly payments to fit borrowers’ incomes

·         Provide clear disclosures

·         Comply with all consumer protection laws

·         Provide adequate notice to borrowers before their payments change

Woodstock Institute provided recommendations to the CFPB to guide initiatives that promote affordability in the private student loan market. The new guidance incorporates some of our recommendations, such as considering ability-to-repay in underwriting standards.

While this guidance applies only to new private student loans, banking regulators urged lenders in 2013 to provide repayment options to current borrowers. The CFPB is trying to find out whether lenders took that guidance to heart. Lenders will receive letters from the CFPB asking them how they are helping borrowers who cannot afford their student loan payments. The CFPB is asking what kinds of loan modification programs are available, how borrowers can learn about and qualify for assistance, and how many loan modification applications were approved or denied.

We applaud the CFPB for taking steps to encourage private student lenders to work with struggling borrowers and urge them to make their findings public. We also urge the CFPB to investigate whether borrowers from certain demographic groups, such as people of color or low-wealth people, are disproportionately being denied private student loan modifications.

The Sale of Corinthian Colleges

Corinthian Colleges, a large chain of for-profit colleges, recently announced that it would go bankrupt due to sanctions from the Department of Education for Corinthian’s noncompliance with federal aid regulations. The CFPB also sued Corinthian for alleged predatory lending practices.

In November, the Department announced that ECMC, a student debt servicer and collector, would purchase more than 50 of Corinthian’s campuses. We joined 50 advocates across the country in expressing our deep concerns about the proposed purchase. ECMC has no experience running an educational institution, and their debt collection and servicing tactics are often unfriendly to consumers. ECMC also wanted to include mandatory arbitration clauses in their contracts with students, limiting students’ rights to pursue relief from their schools.

The sale finalized this week, which includes five Everest College campuses in Illinois, is a major improvement over the original terms. ECMC will not include mandatory arbitration clauses in its enrollment agreements, though they will ban class-action lawsuits. As part of the sale, the CFPB announced an agreement with Corinthian to discharge $480 million of predatory private student loans. While the sale still has problematic elements, the CFPB’s work to secure private student loan relief will help reduce the burden on students who received a subpar education and high-cost predatory loans at Corinthian Colleges. We urge the CFPB and the Department of Education to continue to monitor the transition of Corinthian campuses to ECMC and ensure that they do not engage in predatory practices.