Proposed Law Would Forgive Some Private Student Loans
Student loan debt, and borrowers’ problems repaying student loans are growing. Today, federal student loan debt is $900 billion, and private student loans total $140 billion. Defaults total more than $8 billion, representing 850,000 distinct loans. Many struggling borrowers are calling for private student loan student loan forgiveness, to ease the burdens caused by paying their private student loan debt.
If you are one of the 37.1 million people in the US with a student loan today, your options for handling federal and private student loans differ. Federal student loans are taken out by the students themselves or by their parents, who take out PLUS loans. Most student loans do not have co-borrowers. The Dept. of Education offers a variety of deferment, forbearance, and repayment plans for federal borrowers.
Private student loans almost always have a co-signer, and lenders will collect a private student loan from a co-signer if the primary borrower defaults. Because a co-signer is usually a close family member, a delinquent private student can cause a problem for a whole family, and not just the borrower. Private student loan lenders lack the extensive array of repayment and consolidation the Dept. of Education offers.
New Regulator on the Block: The CFPB
The Consumer Financial Protection Bureau (CFPB) is a new federal agency. The CFPB is responsible for "... mak(ing) markets for consumer financial products and services work for Americans — whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products." The CFPB’s first action was to create an online survey to learn what the biggest concerns were among consumers. The top three were credit card disclosures, mortgages, and student loans.
Congress mandated that the CFPB oversee the student loan industry. As part of its initial review, the CFPB published nearly 2,000 comments about the experiences consumers had with private student loans. The CFPB’s preliminary findings identified many problems, including:
- Lack of good information: Students were unclear what loans to take and what they will owe when they leave school. Also some borrowers were surprised to learn their loans were private instead of federal.
- Students overwhelmed by debt: Part of this may be due to the lack of disclosures, and to a weak economy where recent college grads face high unemployment and underemployment.
- Complicated or hostile billing: Borrowers expressed a desire to repay their loans, but in hardship situations, they faced limited loan repayment flexibility.
The CFPB recently released draft student loan disclosure forms it proposes lenders must use. The forms disclose the interest rate, and eventual monthly payment amount for every student loan. The CFPB hopes this clear and consistent disclosure will spell out how much the student will need to pay each month when they leave school. It will also eliminate surprise loans some unscrupulous schools disguise as grants.
Student Loan Forgiveness Today
Federal loan borrowers have the option to have their loans forgiven or their payments reduced.
If you work in a public service job, you may be eligible to have your federal student loans forgiven. The Public Service Loan Forgiveness (PSLF) discharges remaining student loan debt after 10 years of full-time employment in public service. Your income is not a factor in eligibility, but you must be current on your loan payments.
Some states, such as Kansas and New York, offer partial repayment of their student loans if you relocate to a low-population area. Also, 30 states offer partial student loan repayment if you work in the dental or medical fields.
With federal student loans, you have several options if your payments cause you distress, including:
- Deferment: A postponement of payment on a loan, during which interest does not accrue if the loan is subsidized. You qualify if you are enrolled half-time or more in college, are unemployed, or meet a the Dept. of Education’s standards for hardship. Deferments can last up to three years.
- Forbearance: Forbearance may be an option, if you don’t qualify for a deferment. Forbearance allows you to stop making payments temporarily. Common reasons for getting a forbearance are illness, financial hardship or serving in a medical or dental internship or residency.
- Income-based repayment (IBR): Your monthly payment is capped at an amount intended to be affordable, based on your income and family size. You’re eligible for IBR if your monthly IBR payment will be less than the monthly amount in a 10-year standard repayment plan.
- Income contingent repayment (ICR): Your monthly ICR payment amount is reset each year, based on your annual gross income on your federal tax return.
- Other plans: Other federal repayment plans include graduated repayment, extended repayment, and income-sensitive repayment.
Expanded Student Loan Forgiveness Options
Solutions that bring some relief to student loan borrowers. The Student Loan Forgiveness Act (H.R. 4170), was introduced in March of 2012, Rep. Hansen Clarke (D-Mich.). His proposal includes:
- Consolidating some private loans with federal loans, with many restrictions, to add the benefits available to federal student loan holders to some private student loan holders
- Improving forgiveness of federal loans
- Keeping rates down for federal loans
Private Student Loan Forgiveness
Currently, there are no private student loan forgiveness options available. Today, if you are having trouble with your private student loans, your only options are to:
- Consolidate your loan
- Work out something with your lender
- Try to work out a loan modification,
- File for Chapter 13 bankruptcy to work out an affordable payment (this does not forgive your student loan debt)
- Default and face collection efforts, including lawsuits, judgments, bank levies, and wage garnishments
Although there are renewed calls to wipe out some private student loan debt, enacting principal forgiveness in private student loans would be a huge shift in the lending world. It may result in fewer private lenders in the marketplace and fewer loan options for students. The federal government would have to step in, if current lending levels are to be maintained.
The CFPB is asking for additional input from consumers. The CFPB is going to offer some suggestions, but it is not clear what kind of reform they can put in place.