WASHINGTON (6/26/13)--As concerns over a potential student loan debt crisis grow nationwide, Consumer Financial Protection Bureau Assistant Director and Student Loan Ombudsman Rohit Chopra examined the parallels between the student lending and mortgage markets during a Tuesday Senate Banking Committee hearing.
During the committee hearing, entitled "Private Student Loans: Regulatory Perspectives," Chopra said the issues that student loan borrowers face are similar to those that some mortgage borrowers are still dealing with, and a potential student loan crisis could impact the economy at large. Origination of non-traditional products increased in both industries in the years before the financial crisis. Chopra said higher-risk loans with high interest rates were originated as documentation requirements and other checks that ensure high-quality loans fell by the wayside.
Adding fuel to the nation's student loan market concerns is the fact that the federal student loan rate, currently capped at 3.4%, will double for future loans to 6.8% on July 1 if Congress does not take action. Legislators are reportedly working to craft a solution.
In a statement opening the hearing, Senate Banking Committee Chairman Tim Johnson (D-S.D.) urged regulators "to be vigilant in monitoring growth in the private student loan market that may result from changes to the federal student loan market."
"It is critical that regulators respond quickly to marketplace changes, and that consumer protections are safeguarded when demand rises," Johnson said.
A comprehensive CFPB student debt report released last month found that Americans hold approximately $1.1 trillion in outstanding student loan debt. Former students that find themselves without a job after graduation can run into more trouble when they cannot repay their loans, Chopra said.
"For struggling homeowners and student loan borrowers, the consequences of being unable to find an affordable repayment option are severe," Chopra told members of the banking panel. Future purchasing power, including the ability to buy a home, could be impacted by student loan debt issues, he said.
Developing a robust student loan refinancing market could help alleviate some of these issues, Chopra suggested. "Even if such a program required public funds, or sharing the costs between the public sector and the owners of the loans, the economic benefits of facilitating restructuring activity at a scale might outweigh program costs," Chopra said.
Chopra noted that the CFPB has "been continuously collaborating with financial institutions, consumers, investors, and other policymakers" to improve the student lending market. The CFPB earlier this year asked the Credit Union National Association and credit unions to help address student loan issues.
CUNA in a meeting with the CFPB said credit unions could do more to help debt-saddled grads if the maximum credit union student loan maturity of 15 years was increased.
CUNA has also suggested that giving credit unions greater leeway to work with student loan borrowers and adjust the terms of their loans, as needed, could make monthly payments more manageable for borrowers and help credit unions minimize delinquencies or even charge offs.