WASHINGTON—The private student loan industry is failing to help distressed borrowers avoid default, according to a new report from the Consumer Financial Protection Bureau.With student debt skyrocketing, write-offs surging and concerns about a student lending bubble on the horizon, the CFPB Student Loan Ombudsman released a report highlighting complaints by struggling private student loan borrowers who describe being driven into default.
Through the first eight months of 2013, lenders wrote off $13.6 billion in student loan debt, a 46% increase from the same 2012 period, and the highest amount for this period in any of the last eight years, according to data from Equifax.
The CFPB reports that distressed borrowers say they receive very little information or help when they get in trouble, that there are no affordable loan modification options available, and that the alternatives to default are temporary at best.
"We are hearing from consumers that they are driven into default because private student loan companies are not providing concrete loan modification options," said CFPB Director Richard Cordray. "Struggling private student loan borrowers are finding themselves out of luck and out of options.”
As Cordray urged all private student lenders to “redouble” efforts to assist distressed borrowers, CFPB Student Loan Ombudsman Rohit Chopra, who submitted the report, stated, “Too many borrowers are barely treading water, losing hope that these companies will throw them a lifeline."
The report (http://files.consumerfinance.gov/f/201410_cfpb_report_annual-report-of-the-student-loan-ombudsman.pdf) analyzed more than 5,300 private student loan complaints between Oct. 1, 2013 and Sept. 30, 2014, an increase of 38%. The study revealed that many consumers would repay their debt if they could qualify for a payment plan that reflected their current financial circumstances.
The report shared that borrowers say they are driven to default because there is little information available on ways to avoid default, no affordable loan modifications available, and temporary fixes—such as temporary forbearance—only delay default.
The CFPB has released new tools to help borrowers take action when they run into trouble:
* A sample letter consumers can edit and send to their student loan servicer to request lower monthly payments and information on available repayment plans. (http://files.consumerfinance.gov/f/201410_cfpb_students_sample-letter.doc )
* A sample financial worksheet to assist borrowers to determine maximum funds available to pay their student loans. (http://files.consumerfinance.gov/f/201410_cfpb_students_sample-financial-worksheet.doc)
The CFPB pointed out that changes to the federal bankruptcy law in 2005 created special treatment for private student loans, making it more difficult for consumers to discharge debt, and creating a disincentive for lenders to offer flexible options for borrowers seeking help.