Student loan debt has skyrocketed over the last decade, ballooning from about $600 billion in 2008 to more than $1.5 trillion today.
Approximately 90 percent of the loans made to students and their families each year are from a single lender that would qualify as the fifth-largest bank in the country. This “bank” has a double-digit delinquency and default rate, performs little to no underwriting before making loans, and relies on taxpayers as the final backstop for the approximate $1.4 trillion in student loans on its books. Would it surprise you to learn this lender is the federal government?
CBA’s Education Funding Committee – which is comprised of every national bank in the student lending space that together make about two-thirds of all private education loans – believes the federal government has a critical role to play in helping finance higher education goals for many families, but we also believe students should know all the facts about the education financing options available.
Here are the facts:
• Private student loans offer the strongest consumer protection available: Robust underwriting which includes an assessment of creditworthiness and ability to repay. Federal PLUS loans, on the other hand, are made up to the cost of attendance set by the school, both increasing tuition costs and leaving students and their families with debt they may never be able to repay.
• According to the Federal Reserve Bank of New York, one in five borrowers in repayment is seriously delinquent or has defaulted on their student loans. With nearly 98 percent of all private student loans being successfully repaid, it’s clear a large number of federal borrowers are falling behind.
• Nearly unlimited federal lending, largely through PLUS loan programs, has a direct correlation with increasing tuitions. Every dollar increase in federal aid adds between $0.25 and $0.63 to the price of tuition, according to the Federal Reserve Bank of New York.
• Private student loans do not charge origination fees. Federal loans, on the other hand, charge between 1.1 percent and 4.26 percent of the loan’s value in origination fees on top of interest. Unlike private lenders, the government doesn’t disclose Annual Percentage Rates, which include required fees.
• Private student loans offer borrowers an array of options such as fixed and variable interest rates, various repayment terms and multiple repayment options. These feature allow students to find a loan solution that best fit their individual needs.
• Private loans include three different plain language disclosures, covering 18 key provisions about the loan including the availability of federal loans. These disclosures are given prior to disbursement. Federal student loan disclosures, on the other hand, are opaque and given at the time the loan is disbursed. These federal disclosures should be streamlined and improved. This simple step would improve transparency and help prevent over-borrowing.
• Numerous private lenders offer competitive refinancing and loan rehabilitation options to help borrowers lower their interest rates and simplify or reduce their monthly payments.
• All student loans – federal and private – are treated identically for bankruptcy purposes and are dischargeable in cases of undue hardship.
Despite what some recent reports might lead you to believe, student loan borrowers are always told to check their federal options first. In addition to being sensible policy, it’s required by federal regulations. In other words, those who choose to borrow money from the private sector instead of the government are advised of their options.
So when students decide not to max out their federal loan options, it may very well be because for many borrowers – especially those with good credit – private loans can be a better, more affordable alternative.
Now that we have gone over the basic facts, we can begin the important debate of offering solutions to address both runaway tuition and skyrocketing debt. To ensure the federal government responsibly serves those most in need while also fully using the capabilities and expertise of the private sector to serve the marketplace, CBA has recommended the follow measures:
• Increasing the availability of Pell Grants.
• Ending unlimited PLUS loan borrowing to help reduce tuition increases.
• Implementing “Know Before You Owe” disclosures to clearly explain the terms of federal loans.
• Renaming so-called “Award” letters provided by colleges to the more accurate “Financing” letters and having them clearly differentiate loans from grants and scholarships.
• Requiring school certification of private education loans.
• Utilizing economist-preferred fair value accounting to show the true cost of federal student loans.
• Requiring detailed public reports on performance of the federal government’s direct loan portfolio.
This is an important debate – one that has immense consequences for both student and their families – and getting it right should be required coursework for policymakers and regulators.
Richard Hunt is the president and CEO of the Consumer Bankers Association.
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