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.
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.
Hunt also stated that "[l]enders should be able to offer forbearance more frequently and for longer periods than is currently permitted."
Forbearance is typically requested when a borrower is in bad financial straits, usually due to unemployment, loss of income, illness or disability that prevents the borrower from working. Even though payments are suspended, the loan balance will increase until they are resumed. Forbearance provides temporary relief from making payments, but they will have to be continued at a future date. A result can be an increase in the total cost of the loan.
Of perhaps greater concern are loans made before the credit freeze, chiefly those made in 2007 and 2006, when underwriting standards got short shrift in a rush to lend during those flush times. An August 2012 study by the Consumer Financial Protection Bureau found that about 60% of loans made by private lenders had co-signers during that period. Co-signed private loans have reached about 90% in the current decade. Michelle Person of the CFPB did not comment on student loan payment alternatives.
FDIC spokesperson Greg Hernandez referred questions on the matter to the OCC, where spokesperson Jennifer Collins refuse to comment because of the organization's pending response to the CBA. A spokesperson for the Federal Reserve Board could not be reached for comment.
The buck may stop with regulators who will decide on what constitutes safety and soundness. By the same token, consumer advocates say that they're trying to sort through the degree to which current regulation is handcuffing banks from offering loan modifications.
The Consumer Bankers Association, which represents numerous private student lenders, is arguing that regulators should treat such loans differently than other asset classes because theyand their borrowershave unique characteristics.
"Statistics show that people with a college education have far more earnings potential than those without a college education," said the Consumer Bankers Association's Hunt in its letter. "However, for student loan borrowers, it usually takes time before a career can be launched and financial independence can be established, a far more pronounced outcome in the current economic environment."
The unemployment rate for Americans in their 20s continues to be high. The rate for those who were 20 to 25 was 13.3% last year and 8.9% for 25 to 29 year-olds. The overall adult unemployment rate was 8.1%.
While Senator Warren's legislation doesn't affect private loans, it could foster a climate where changing the terms of student loans across the board becomes more acceptable. On July 1, interest rates on Federal loans are set to double to 6.8% from 3.4%. Students would be allowed to borrow at the Fed funds rate, currently about 0.75%, between July 1, 2013 and July 1, 2014. Unless Congress acts, rates would spike again.
"If the Federal Reserve can float trillions of dollars to large financial institutions at low interest rates to grow the economy, surely they can float the Department of Education the money to fund our students, keep us competitive and help grow the middle class," Warren said.
--Written by John Sandman for MainStreet--