Yesterday I wrote about the difficulties many active duty soldiers have recently experienced when trying to find out about their education benefits and loan options. But military students are not the only students currently struggling with these problems. The Consumer Financial Protection Bureau (CFPB) logged nearly 3000 complaints about private student loan companies and financing since March of this year, according to therecently released Annual Report of the CFPB Student Loan Ombudsman. The report summarizes the following conclusions:
- “The vast majority of the complaints were related to loan servicing and loan modification issues.”
- “87% of all student loan complaints were directed at just seven companies.”
- “The complaints and input received by the CFPB resemble many of the same issues experienced by mortgage borrowers, such as improper application of payments, untimeliness in error resolution, and inability to contact appropriate personnel in times of hardship.”
- “Many borrowers feel overburdened by paperwork and other requirements to activate incentives marketed prior to loan origination.”
According to The Chronicle of Higher Education,
“About two-thirds of complaints collected by the bureau were related to repayment, including fees, billing, deferment, and forbearance. The next largest group of complaints, about 30 percent of the total, concerned problems borrowers face when they are unable to make payments, such as issues with default and debt collection. The remaining 5 percent of complaints involved confusion around taking out loans.”
This has led CFPB ombudsman Rohit Chopra, who authored the report, to compare the practices of private student loan agencies to the mortgage companies that issued sub-prime mortgages without clear and thorough information to their borrowers. Like all ombudsmen, Chopra’s job is to investigate complaints and mediate between two distinct parties, in this case students and the private financial institutions that loan them money to go to college. He works on behalf of the CFPB in conjunction with the U.S. Department of Education.
The CFPB report aligns with what other investigations have shown. For example, FOXBusiness shared that “a survey by Young Invincibles, a youth advocacy nonprofit in Washington, D.C., shows that among students who only took out private loans (no federal loans), nearly 70% were not informed of their other options.”
What Are Private Student Loans?
As the cost of college has increased, these loans have become more common. An additional factor has been a decrease in the amount of state and federal financial aid support. FinancialAid.org defines private student or education loans this way:
“Private Education Loans, also known as Alternative Education Loans, help bridge the gap between the actual cost of your education and the limited amount the government allows you to borrow in its programs. Private loans are offered by private lenders and there are no federal forms to complete. Eligibility for private student loans often depends on your credit score.”
In other words, if you have a poor credit score, you may not be able to get a private education loan from a financial institution. This differs from federally guaranteed student loans, for which a credit score is not required. Finally, private student loans have variable interest rates, unlike federal loans that have fixed interest rates. This difference is important because your interest rate will determine the total payoff amount of your loan.
Interestingly, student loan financing, especially the difference between federally-supported loans and private loans, has played a role in the current presidential election. President Barack Obama supports the continuance of federal student loans, while Republican candidate Mitt Romney favors private student loans over federal loan programs and argues in favor of reintroducing private loan agencies to administer them. Along similar lines, he has vowed to repeal laws that were passed by the Obama administration that cap student loan monthly payments or reduce or forgive student loan debt if the student has completed public service.
Recommendations for Students
To clarify and reform the processes of both contracting a private student loan and repaying it, the CFPB offered these suggestions for reforming the system in its report:
- “Assess whether efforts to correct problems in mortgage servicing could be applied to improve the quality of student loan servicing.”
- “Continue initiatives to increase adoption of the Income-Based Repayment program for federal student loans.”
However, students themselves can take action to prevent any of the problems the CFPB recorded in the complaints it has received. Here are five things to know about college financing and private student loans in particular:
- Private loans are more expensive than federal loans. Educational consultant Steven Roy Goodman advises that students should “max out their federal options and ask their financial aid office for help” in exploring all options for covering their college costs.
- The interest rate you get on a private student loan will depend on your credit score, and if you struggle with making your payments on time or default on your loan, it will have a detrimental effect on your credit score, making it harder to continue taking out loans to attend school if you decide to do so in the future.
- Private loans cannot be canceled or forgiven, unlike the federal loans I discussed above.
- Federal loan payments can be deferred if you experience economic hardship such as unemployment. Private loans, by contrast, do not offer deferrals, and if you lose your job, are hit with catastrophic medical bills, or experience other financial problems, you will still have to pay regularly on your private student loan debt.
- Private loans do not offer income-based repayment plans, in which your income and expenses are considered when determining how much you pay back every month. The federal student loan program does offer income-based repayment.
All of these factors must be considered by students when putting together the financial package for their college expenses. One good tool to help you do this is the Know Before You Owe tool offered by the USDOE and CFPB. You should also speak with your college’s financial aid staff.
Do you have any stories about your experiences with private loans? Share them here!