* Private loan market grew as investors bought asset-backed
* Defaults have risen since the financial crisis
* Report required by Dodd-Frank oversight law
By Emily Stephenson
July 20 Borrowers who took out private student
loans in the run-up to the financial crisis are facing higher
levels of default, reflecting the risky lending practices at the
time, the Obama administration said in a new report.
The Department of Education and the Consumer Financial
Protection Bureau said private lenders have since cleaned up
some of the worst activities, but lawmakers should still work to
improve the private loan market and enhance protections for
"Borrowers who took out loans at the height of the boom are
still suffering from those excesses," CFPB Director Richard
The report said students taking out private loans may not
have fully understood the loans they chose and may have
unnecessarily been subjected to more expensive terms.
The two agencies said they were required by the Dodd-Frank
financial oversight law to study the private student loan market
and determine if gaps existed in consumer protection.
Federal and private loans do not have to be repaid while the
borrower is in school, and both types offer deferment for
students seeking post-graduate degrees. But unlike some private
loans, federal loans have fixed interest rates and offer
adjustments for borrowers who struggle to make payments.
Federal loans are much more common than private loans, with
$864 billion in outstanding federal student debt and about $150
billion in outstanding private student debt, the report said.
But the private student loan market grew from less than $7
billion in 2001 to more than $20 billion in 2008, before
shrinking, according to the report.
The study found that investors' desire for asset-backed
securities led private lenders to market loans directly to
students without involving schools. That caused some students to
borrow more than they needed or turn to private loans before
exhausting the available federal options.
Companies also gave loans to borrowers with lower credit
scores during that period, the report said.
Student loan defaults have since risen, likely due to risky
lending as well as a weak labor market. There are now more than
$8 billion in defaulted private loans, or 850,000 distinct loans
After 2008, lenders began requiring co-signers for more
loans, increased school involvement in securing private loans
and tightened credit standards for loans, the report said.
Cordray and Education Secretary Arne Duncan said Congress
should step in to prevent private lending from growing risky
again in the future. They want lawmakers to ensure that schools
are involved in the private student loan process and find ways
to offer relief to struggling recipients of private loans.
Congress should take a special look at a 2005 change to
bankruptcy law that makes it more difficult to get out of
private student loans, Cordray said. The change has not resulted
in lower prices or better access and should be revisited, he
Duncan said his department plans to release a financial aid
"shopping sheet" that schools can provide to help students and
parents understand the aid and loan packages available to them.
"What we don't want ... is for a student to feel like the
first time they really understood how much debt they were in was
when the first bill arrived," Duncan said.