New America Foundation
By: Stephen Burd
July 19, 2011
Starting Thursday, there will be, for the first time, a single federal agency in charge of regulating private student loans. The new Consumer Financial Protection Bureau (CFPB) replaces a patchwork of government agencies that for years turned a blind eye to the predatory private loan practices that we at Higher Ed Watch have helped expose since the blog's start in 2006.
The Dodd-Frank financial overhaul bill that Congress approved last year put the new bureau in charge of writing rules that apply to all private student loans, including those offered by non-banks, such as Sallie Mae and for-profit colleges. It also gave the CFPB full oversight and enforcement authority over non-banks and banks with more than $10 billion in deposits. In addition, the legislation established a new Private Student Loan Ombudsman within the CFPB who will not only assist borrowers but will also analyze complaints that are filed with the bureau against lenders to determine whether there are any clear patterns of abuse -- and make policy recommendations to Congress and the administration to address them.
The bureau, however, will not be at full strength at the start. That's because the law requires the CFPB to have a permanent director in place before it can carry out many of the consumer protection responsibilities that Congress assigned it. While President Obama on Monday nominated former Ohio Attorney General Richard Cordray to lead the CFPB, Senate Republicans have vowed to block his confirmation until major changes are made to the bureau's structure that would significantly weaken it.
Nevertheless, the increased oversight that the new entity promises to bring to non-federal student loans is extremely welcome, particularly at a time when private student loan marketplace appears to be on the rebound.
It may seem like ancient history now, but it was only a few years ago that student loan industry officials were predicting that the total volume of private loans, which had been soaring each year, would eclipse that of federal loans within a decade. Back then, students were regularly being inundated with television and radio advertisements and pop-up ads on the Internet from direct-to-consumer private student loan companies that were promising them easy-to-obtain loans of up to $50,000 a year. Many of these ads at least implicitly discouraged students from taking out federal loans, by stressing how much easier it was to obtain a private loan than a federal one -- without mentioning, of course, that private loans generally lack the fixed rates, consumer protections, and flexible repayment options that the federal loan programs offer.
At the same time, many colleges were entering into sweetheart deals with lenders that allowed them to include private loans in the financial aid packages they were offering students, including to those would not ordinarily qualify for the loans because of their poor credit records. Some of these colleges were even allowing lenders to brand these high-cost loans with their names and logos to make them more appealing to students.
But the private loan go-go days came to an abrupt end when the credit crunch hit, and lenders were no longer able to finance the kinds of risky loans they had previously been making. Many loan companies left the business. Those that remained, like Sallie Mae, significantly tightened their underwriting standards and began requiring students to seek out co-signers for their loans. Meanwhile, Congress raised the federal student loan borrowing limits -- which at least temporarily reduced students' need for private loans.
As a result, private loan borrowing by undergraduates plummeted from its height of about $17 billion in 2007-08 to $8.5 billion in 2008-09 and $6.3 billion in 2009-10, according to the College Board.
The tide now seems to be turning. According to a report that our friends at the Project on Student Debt released last week entitled "Critical Choices: How Colleges Can Help Students and Families Make Better Decisions about Private Loans":
The results reported by the largest lenders in recent months showed increased growth and competition in the market. Among the largest lenders in this market, Sallie Mae's private loan volume grew rapidly in the first quarter of 2011. Wells Fargo reported growth in private loans since at least the second quarter of 2010, and Discover continued to report steady growth in its existing private loan portfolio. Lenders and analysts are predicting increasing demand for private student loans as the cost of college continues to rise faster than available family and federal financial aid resources.
Even with the overall volume down from peak levels, competition among the largest lenders has increased and new lenders have entered the market. Well Fargo has reported an increase in market share and Discover greatly expanded its involvement in this market by acquiring Citibank's private student loan business. Seeking to increase volume, Sallie Mae recently lowered its interest rates, and Wells Fargo introduced fixed-rate private loans. In the last few years, credit unions have also been entering the market in growing numbers, and recent announcements suggest they are expanding their private student loan products. [Editor's Note: Higher Ed Watch is supported in part by a grant from the Institute for College Access and Success, which runs the Project on Student Debt]
The revival of the private loan market makes it all the more important that the government keep a watchful eye over this industry. Hopefully, with a new sheriff in town, lenders won't even think about engaging in the types of predatory practices that have caused so much damage.