This article first appeared in the St. Louis Beacon, Nov. 26, 2013 - Americans who are paying off private student loans might find insights into their complicated monthly statements in a recent annual report published by the Consumer Financial Protection Bureau.
Private loans have drawn the scrutiny of Rohit Chopra, the student loan ombudsman for the bureau, a federal agency established by Congress in 2010 to oversee the consumer financial industry.
Chopra presented the keynote address last week at a symposium on student loan debt hosted by the St. Louis Federal Reserve.
In his presentation, Chopra voiced overall concerns about rising college debt. About 40 million Americans currently owe about $1.2 trillion in federal and private student loans. That is double the amount owed in 2007. In 2010, 40 percent of households headed by an American under 35 were paying off student loans.
On the plus side, a college graduate with a bachelor’s degree can expect to earn an average of $1 million more in lifetime income than a wage-earner without a degree, according to an analysis of Census Bureau data, Chopra said. But he noted that the growing income gap isn’t due to rising starting wages for the average college graduate, it’s because the wages of the non-degreed are falling rapidly. When accounting for inflation, young college graduates are seeing lower starting wages.
Chopra described college degrees as "valuable insurance” against unemployment "with premiums that keep going up.”
Borrowers report problems with servicers
Chopra also addressed issues that borrowers are reporting in working with the servicers of their student loans, and he was critical of private loans because they offer fewer options for income-based repayment than federally backed loans. In that respect, he likened the problems of some private loan borrowers to the mortgage industry where borrowers found few options for modifying or refinancing mortgages, even though it would have been in the best interest of the investors of the loans to do so.
To file a complaint
Consumers who have an issue with their student loan servicer can file a complaint with the Consumer Financial Protection Bureau. Complete information and instructions are available on the website.
Consumers can file complaints regarding their private student loans on the consumer bureau’s website. The agency released a report in October based on about 3,800 complaints made between Oct. 1, 2012 and Sept. 30, 2013.
Nearly half of the complaints had to do with loan modifications: Consumers in financial distress reported difficulty in working out affordable repayment options. Other complaints cited problems with servicers over account information, including processing errors or the way payments were applied.
Some borrowers reported being stymied by servicers in their attempts to pay off higher-interest loans first, particularly when several loans are bundled together into one statement. Because interest accrues daily, the amount of the payment applied to principal will vary, depending on when the payment is made. Instead of applying extra payments to principal, some servicers apply the additional funds to the next month’s statement, denoting them as "paid ahead.” Other servicers divide extra payments among all loans, despite a borrower’s instructions to target all extra funds to the loan with the highest interest rate. The policy can circumvent a borrower’s goal of paying off high-interest loans first.
At the St. Louis conference, Chopra applauded efforts by policymakers to improve college completion rates and reduce costs for future students. But he pointed out that those efforts would not address the problems of current borrowers. He stressed the importance of refinancing options for all borrowers, including those with private loans, to take advantage of current low interest rates.
Repayment plan makes a difference
This table, taken from the Consumer Financial Protection Bureau's report, shows how repayment strategy can affect the final cost of a loan.
In this scenario, a borrower has three loans of $10,000. The loans have interest rates of 7%, 9% and 13%. If the borrower makes an extra $100 payment each month, she can save between $4,500 and $5,400 — and how much depends on how the extra payment is applied.
If the extra payment is split evenly between each loan, the borrower will save $4,514.98 at payoff. If the extra payment is split proportionally by how much the regular monthly payment is, the borrower will save $4,613.31 at payoff. If the extra payment is allocated entirely to the highest-interest loan, the borrower will save $5,403.62 at payoff.
| Starting Balance | Standard Monthly Payment | Extra $100 Split Evenly | Extra $100 Pro- Rated BY REGULAR MONTHLY PAYMENT | Extra $100 Applied to Highest Interest Rate Loan |
|---|---|---|---|---|---|
Loan 1-01 (7% rate) | $10,000 | $116.11 | $149.44 | $145.72 | $116.11 |
Loan 1-02 (9%) | $10,000 | $126.68 | $160.02 | $158.98 | $126.68 |
Loan 1-03 (13%) | $10,000 | $149.31 | $182.64 | $187.40 | $249.31 |
Total One-Time Monthly Payment | $392.10 | $492.10 | $492.10 | $492.10 | |
Savings at Payoff | $4,514.98 | $4,613.31 | $5,403.62 | ||
Lending industry responds
Private lenders are committed to working with borrowers but have less latitude than the federal government, said Richard Hunt, president and CEO of the Consumer Bankers Association, in an interview with the Beacon. The Consumer Bankers Association is the trade association for retail banking that is geared toward consumers and small businesses.
Due to policy changes in 2010, Hunt said, the federal government has squeezed private lenders out of the marketplace, and they now account for only about 7 percent of loans. He said private lenders have more stringent underwriting policies and criticized federal loan programs for not taking into account a borrower’s ability to repay.
"This does not bode well for the American taxpayer and for the student,’’ he said. "We have very low underwriting from the federal government on a student’s ability to repay.’’
Hunt said that policymakers should be emphasizing college affordability.
"We have astronomical costs of attending college. The No. 1 thing we have to address is college affordability. Otherwise, we’re going to be talking about this problem for decades,’’ he said.
Hunt said that private lenders recognize that there have been some problems with servicers and are working to make the payment process more transparent and easier to navigate.
"There are always things we can do better,’’ he said.
Regarding income-based payment, Hunt said that private lenders do offer forbearance to students who are trying to get jobs once they finish college, and they have petitioned regulators to allow them more flexibility.
"We do have to meet a safety and soundness measure. We just can’t print money like the federal government can,’’ he said. "We work every day with students to make sure they pay their obligation in these very difficult times and do everything we can to extend their payment periods.’’
