Alert July 24, 2012

CFPB and Department of Education Release Study on Private Student Loan Market

The CFPB and the Department of Education released a private student loan market study.  In its press release, the CFPB noted that the study generally found that the private student loan market has increased, but that underwriting standards have loosened, resulting in many private student loan borrowers struggling to repay their loans.  The study also found that private student loans are disproportionately used by undergraduate students attending for-profit colleges (over 42%, compared to 14% for all undergraduate students).  

Importantly, the study found potential fair lending issues in the current private student loan market.  In particular, the study noted that unlike traditional forms of credit, although the private student loan borrower lacks income and credit history, the loans are fully funded. This practice results in different standards to determine ability and willingness to repay. As such, “cohort default rates”—a measure of the federal student loan repayment history of a particular group or “cohort” of borrowers—are used to assist private student loan lenders in eligibility, underwriting and pricing decisions.  However, according to the study, the use of such rates may implicate fair lending issues under the CFPB’s disparate impact approach because racial and ethnic minority students are disproportionately concentrated in schools with higher cohort default rates.

To address the concerns arising from the study, the CFPB and the Secretary of Education made similar recommendations including:

  • Requiring school certification of private student loans (e.g. affirmative certification from school that loan amount does not exceed student need);
  • Modification and clarification of the definition of “private student loan” under the Truth in Lending Act; and
  • A centralized database to access information about private student loans similar to the National Student Loan Data System provided to borrowers of Federal loans.

Both agencies stressed that a review of the Federal Bankruptcy Code is needed to determine if additional relief for borrowers in the private student loan market may be found there.  The agencies also noted that private student loans do not offer similar debt management or mitigation options that Federal student loans borrowers enjoy (e.g., forbearance, rehabilitation, or deferment).

The CFPB also released a fact sheet on its study of the private student loan market and announcedweb tool in conjunction with the Department of Education to help borrowers who have defaulted on their student loans. The CFPB previously published public comments on borrower’s experiences and issued a notice and request for information on existing private student loan complaints (see June 26, 2012 Alert).