Private Lenders Should Take the Lead on Student Loan Refi, says CFPB

NEW YORK (MainStreet)—The Consumer Financial Protection Bureau is looking to private lenders to take the lead on re-financing student loans, as borrowers continue to struggle with educational debt. In a request for information last February, the CFPB received more than 28,000 comments suggesting private loan repayment alternatives. Many were concerned about a domino effect, where steep monthly loan payments lead to unwanted career and life choices.

Problems with the loans themselves resist an easy fix. The CFPB found that private loans are generally riskier for the borrower than federal loans, with higher interest rates and few consumer protections. They often lack flexible payment options when borrowers can't earn enough to make minimum payments. There is a dearth of lenders offering lower cost alternatives—and that's the rub, especially for those who have fallen behind.

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"There are few options for financial relief for borrowers who are struggling with their private student loans," said Mark Kantrowitz, senior vice president and publisher at Edvisors Network. "Private student loans are not eligible for income-based repayment and forbearance options are limited. These borrowers have been unable to negotiate flexible deferment and repayment options with their lenders."

Among the problems are rules that limit lenders' options, especially accounting rules. "For example, a lender has only 120 days to work with the borrower according to current accounting rules," he said. "Some of the potential accommodations are treated more severely than they should be by accounting rules. Sometimes lenders have more flexibility to grant accommodations if they allow the loans to be charged off first."

Even something as basic as contact between lenders and borrowers can be thwarted by rule -making. "For example, college students are more likely to have a cell phone as their only telephone number," Kantrowitz pointed out, "yet a federal law precludes lenders from making robocalls to cell phones—which would be done to maximize the time a counselor has with a borrower. Counselors have to manually call the number."