Five Steps the New Consumer Bureau Can Take to Make Private Loans Safer

Now that the new Consumer Financial Protection Bureau (CFPB) has opened its doors, what can it do to make private student loans safer for students?

In recent days, both our colleagues at the Project on Student Debt and student aid expert Mark Kantrowitz have recommended steps the CFPB can take to achieve this goal. At Higher Ed Watch, we have sifted through these proposals and chosen five that we think will do the most to help students avoid taking on unnecessary debt and keep private student loan providers honest. [Editor’s Note: Higher Ed Watch is supported in part by a grant from the Institute for College Access and Success, which runs the Project on Student Debt.]

In our opinion, the bureau should:

• Require lenders to get colleges’ permission before providing private loans to their students

The single most important step that the CFPB can take to stop students from borrowing private loan debt unnecessarily is to require colleges to certify a student’s need for these loans before that individual can receive them. By instituting such a requirement, the bureau would give college financial aid administrators the opportunity to counsel students to ensure that they have exhausted their federal loan options before taking out higher cost and riskier private loans. The Project on Student Debt’s new report, “Critical Choices: How Colleges Can Help Students and Families Make Better Decisions about Private Loans," shows how crucial this counseling can be in helping students make better borrowing choices.

• Use the bully pulpit to encourage colleges to provide counseling to their students before certifying private loans

The consumer bureau can’t force colleges to counsel students before certifying private loans from direct-to-consumer lenders, but it should do all it can to encourage them to do so. As the Project on Student Debt report states, the school certification process gives college aid administrators “a unique opportunity -- and responsibility -- to help students and families make informed and careful decisions about how, and how much, to borrow.” Unfortunately, many schools simply approve all of the certification requests they receive -- leaving students in the dark about their cheaper and safer student aid options.

• Require lenders to regularly send borrowers loan statements while they are in college

Too many students get in over their heads in debt because they don’t keep track of how much they have borrowed and/or understand the terms of their loans. According to Kantrowitz, who offered this proposal, the CFPB can go a long way in addressing this problem by requiring lenders to provide loan statements “to the borrower at least once a quarter and preferably monthly while the student is enrolled in college, instead of waiting until the student graduates.” These statements, Kantrowitz writes, will “help prevent surprises when the students graduates,” and could help them make smarter borrowing decisions in the future.

• Create a central clearinghouse for keeping track of complaints about private loans

If the bureau wants to safeguard students from predatory lending practices, it must have a system in place to identify them. The CFPB should create a clearinghouse that would, according to Kantrowitz, “permit analysis to identify patterns of complaints and trends.” He writes that “the complaints should be tracked according to type of complaint, loan characteristics (e.g. amount, term and interest rate), individual lender, lender characteristics, borrower characteristics, and characteristics of the educational institution.”

• Require more comprehensive federal data collection on private loans

The federal government currently doesn’t collect and disseminate accurate and timely information about private student loan debt. As it stands now, the best information available comes from the National Postsecondary Student Aid Study (NPSAS), a nationally representative survey that aims to determine how students pay for college. Unfortunately, the U.S. Department of Education’s National Center for Education Statistics (NCES) conducts this survey only every four years, so the information it provides becomes dated quickly. And while it is helpful in identifying broad trends, it doesn’t include a large enough sample to provide school-by school data. The CFPB “has the authority to require more comprehensive federal data collection on private student loans, which would greatly enhance the ability of analysts, policymakers, and colleges to understand private loan borrowing patterns,” our colleagues at the Project on Student Debt argue. “This in turn could inform efforts to reduce students’ reliance on this risky form of financing.”

Conclusion

At Higher Ed Watch, we hope that these recommendations provide a useful roadmap for the consumer bureau to follow to try to make private loans at least a somewhat less risky option for students.