Student loans, the banks have been saying, are in a different space than other types of consumer debt. Although recent college graduates are entering the job market during a severe economic down turn, the potential for them to have solid incomes still exists, and their workouts should be treated differently, if only in the way that banks account for them on their books.
But regulatorsthe Federal Deposit Insurance Corporation, the Federal Reserve Board and the Office of the Comptroller of the Currency--didn't go as far as the banks had hoped. While they gave their blessing to "prudent workouts," their new position was essentially to embrace the status quowhere workouts were available to those that provided a limited amount of risk to the lender's balance sheet.
"As the FDIC reviewed the Consumer Financial Protection Bureau's work around private student loans, it became clear that there was some confusion about the FDIC's policies regarding private student loan modifications and workouts," said FDIC spokesperson Greg Hernandez. "The FDIC decided to issue an interagency statement to clarify both that we support efforts by banks to work with student loan borrowers and that our current regulatory guidance permits this activity." The statement can be found here.
In addition, Hernandez said, "The statement makes clear that FDIC-supervised institutions should be transparent in their dealings with borrowers and make certain that borrowers are aware of the availability of workout programs and associated eligibility criteria."
Perhaps the biggest concern is with loans made before the 2008 financial crisis, especially those made around 2006 and 2007, when only 60% of loans were co-signed, compared with roughly 90% today. The Consumer Financial Protection Bureau's August 2012 report Private Student Loans has another significant metric: more people with student loans are turning to bankruptcy, even though student loan debt cannot be discharged in a bankruptcy filing.
"Student loans differ from other forms of credit, so I think that lenders should be given more flexibility," said Mark Kantrowitz, executive vice president and publisher of Edvisors's Network, a group of educational Websites that provides intelligence on student loans. Kantrowitz also noted that lenders were not mandated to spell out the specifics of their delinquent loan workout practices, although he added, "Sallie Mae has some discussion on this in their 10Q filings."
For its part, the SLM CorporationSallie Mae, the largest originator of private student loanssounded workout-friendly, although it has been the target of criticism from student groups who have denounced its lending and collection practices.
"For our private education loan customers experiencing financial difficulty, we work one-on-one to identify a solution that helps them navigate difficult financial circumstances," said Newark, Delaware-based Sallie Mae spokesperson Nikki Lavoie. "They could include modified loan terms, lower interest rates, a good-faith catch up program and temporary suspension of the requirement to make payments."
Lavoie referenced Sallie Mae's 2012 10-K filing, specifically the section "Our Approach to Assisting Students and Families in Repaying their Education Loans" which is available here.
Other major private lenders include Citigroup, Discover Financial Services, JP Morgan Chase, Key Corp, PNC Financial Services, SunTrust Banks, U.S. Bancorp and Wells Fargo.
--Written by John Sandman for MainStreet