Big Banks Looking to Catch a Break on Student Loan Debt

NEW YORK (MainStreet)—Student loans are becoming a matter of concern to big bank lenders, who are seeking permission from their federal regulators to extend the time borrowers have to pay off some private loans. Among them are Citigroup, Discover Financial Services, JPMorgan Chase, KeyCorp, PNC Financial Services, SunTrust Banks, U.S. Bancorp, Wells Fargo and Sallie Mae Bank, a wholly-owned subsidiary of the SLM Corporation, the private student loan provider.

Also see: Can the Student Debt Crisis Outshine the Housing Bubble?

In a related event, Senator Elizabeth Warren (D-Mass.) introduced legislation yesterday that would cut the interest rates on federal student loans while looking at a long-term overhaul of loans and the lending process.

Lenders hope that banking regulators will allow them to avoid taking an accounting hit when they offer forbearance to new graduates, many of whom are either in low paying jobs or looking for work.

In a March 27 letter, Richard Hunt of the Consumer Bankers Association asked the Federal Reserve Board, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency (OCC) to loosen their rules on repayment. "Specifically, we propose that banks should be granted greater flexibility to work with borrowers experiencing financial difficulty who are recent graduates, or early in their careers, when it is more difficult to enter the labor force and establish financial independence and stability," he said. "This could be structured in a way designed to assist borrowers who are looking for their first job, or who are between jobs, during a 3-year period following graduation, while at the same time maintaining adherence to safety and soundness principles at regulated financial institutions."

A bank that offers a borrower a workout of this type runs the risk of having examiners classify the loan as a troubled debt under current regulations. Once that accounting designation is made, banks may have to set aside larger reserves for loan losses, which can have an impact on earnings.