WASHINGTON (7/23/12)--Revising the Truth in Lending Act to clarify the definition of "private student loan" is one of many steps that Congress could take to improve the educational lending market for students, families, schools and financial institutions, Consumer Financial Protection Bureau (CFPB) Director Richard Cordray said in a recent report.
The recommendation is one of many made in a joint CFPB/U.S. Department of Education (DOE) private student lending industry report that was released last week. The report was mandated by the Dodd-Frank Wall Street Reform Act.
The report found that loosened lending standards between 2005 and 2007 made private student loans risky for many consumers, and led to many students borrowing more than they needed to finance their educational expenses. The private student loan market grew to $20 billion in 2008, and private student loan default rates "have spiked significantly" since that time. More than 850,000 individual student loans are in default, the report noted. This adds up to $8 billion in unpaid loans.
While federal student loan terms are usually more favorable than private loan terms, the CFPB/DOE examination found that many students did not exhaust their federal Stafford Loan limits before they took out private student loans. Borrowers also lacked an understanding of key differences between private and federal student loans.
Congress could require lenders to work more directly with educational institutions during the student loan origination process. The report suggested that lenders verify that the loan amount requested by a student does not exceed the student's needs, and said private lenders could also be required to examine a borrower's federal loan eligibility before they take out a student loan.
Schools and lenders could also do more to inform borrowers of student loan costs before they take them out, and Congress could also examine recent bankruptcy law changes that make student loans non-dischargeable debt in bankruptcy proceedings.
Six colleges and four state university systems last month agreed to work with the CFPB and DOE to provide key financial information to incoming students. The information, which includes details on college costs, financial aid options, grant and scholarship information, and estimated loan repayment rates, will be provided to students starting in 2013.
The CFPB and DOE are also working together on an online student financial aid comparison tool. The agencies hope to officially launch the tool during the next school year.
The Credit Union National Association estimates that around 300 credit unions currently offer student loans to their members. Credit unions also provide financial education and seminars relating to student lending generally, and encourage students to attend. The CUStudentLoans.org website also provides extensive financial education regarding student lending, through both written information and webinars. The site is powered by Fynanz, a CUNA Strategic Services provider.