Congress Will Punt Student Loan Rate Fix to CFPB: Washington Analysis

Lawmakers ‘will not move forward with legislation aimed at private student loans,’ insiders say; federal Stafford loan rates likely to double

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With only days left for lawmakers to prevent rates on some new federal student loans from doubling, Washington insiders say Congress will punt the private student loan issue to the Consumer Financial Protection Bureau.

Analysts at Washington Analysis said Monday that they believed “Congress will not move forward with legislation aimed at private student loans.” Rather, “we expect the CFPB will eventually develop private student loan servicing standards.”

During a hearing held Tuesday by the Senate Banking Committee called “Private Student Loans: Regulatory Perspectives,” Chairman Tim Johnson, D-S.D., offered some scary statistics about the state of student loan debt: It “now stands at over $1 trillion and is second only to mortgage debt as the largest form of debt in the country,” balances “have almost tripled since 2004,” and “an alarming one-third of borrowers are delinquent on their loans.”

Sen. Jack Reed, D-R.I., said that if Congress fails to act, interest rates will double July 1 on federal Stafford loans—jumping from 3.4% to 6.8%.

Eleanor Blayney, consumer advocate for the CFP Board, told AdvisorOne that because Congress has yet to reach an agreement, "it becomes more likely that rates will double on subsidized federal loans."

Rohit Chopra, student loan ombudsman for the CFPB, who testified before the committee, responded to Reed’s comment that the change in the Stafford student loan rates—if they doubled—would “only impact future borrowers, not those currently trying to refinance and pay back those loans.” He said that while “some would guess that change would be a slight tail wind to private loan origination, I don’t expect it to be a huge one.”

As revealed during testimony at the hearing, recent studies report that about 39 million borrowers have a student loan, with an average balance of about $25,000.

Of this total student loan debt, the CFPB has estimated the size of the private student loan market to be about $150 billion as of year-end 2011, representing about 15% of student loans outstanding, compared with 85% for the federal student loan market.

Johnson noted that nearly 1 million borrowers are in default on their private student loans. “While federal loans offer flexible relief during periods of hardship, most private student lenders do not offer the same options for struggling graduates,” he said.

Sen. Michael Crapo, R-Idaho, agreed, adding that one concern he often hears “is that banks do not offer enough borrower relief options,” such as refinancing of private student loans.

Todd Vermilyea, Senior Associate Director for the Division of Banking Supervision and Regulation at the Federal Reserve and Doreen Eberley, director of Risk Management Supervision at the Federal Deposit Insurance Corp., who both testified before the committee, offered to work with committee members to fill the refinancing gap.

It’s “unclear why there is not an active refinance market for student debt,” Eberley said. “We’d be interested in working with you on that.”

Added Vermilyea: “Regulatory policy would allow for it.”  

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