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From Banking and Finance Law Daily, May 9, 2013

CFPB Report Addresses Student Loan Affordability

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has published a report on private student loan affordability and the potential impact of student loan debt burdens. The report, Student Loan Affordability: Analysis of Public Input on Impact and Solutions, analyzes and discusses public comments submitted in response to a Request for Information Regarding an Initiative to Promote Student Loan Affordability published in the Federal Register in February 2013.

The Dodd-Frank Act requires the CFPB’s student loan ombudsman to analyze input from borrowers, prepare an annual report, and make recommendations to policymakers, including the director of the bureau, the Secretary of the Treasury, and the Secretary of Education.

Background. There are more than 38 million student loan borrowers with over $1.1 trillion in outstanding debt, according to the report. The majority of the market consists of loans originated by financial institutions and the government under Title IV of the Higher Education Act. The remainder of the market consists of private student loans.

Generally, high student debt burdens limit borrowers’ ability to take on new financial obligations. Between 2007 and 2010, the average student loan balance for households with student debt climbed by nearly 15 percent, even as households have deleveraged and other classes of consumer debt have declined. Over this period of time, younger consumers have increasingly shied away from forming new households. Census data reveals that nearly 6 million Americans ages 25 to 34 lived with their parents in 2011, an increase from 4.7 million in 2007. Research from the Federal Reserve Bank of Cleveland shows that three-quarters of the overall shortfall in household formation can be attributed to reductions among younger adults ages 18 to 34. Some commenters have suggested that this reduction is due to rising student debt levels, causing young adults to avoid the financial obligations necessary to start a family.

A college degree "has the potential to become more of a burden than a blessing for those saddled with unmanageable debt in a tough employment market," CFPB director Richard Cordray said in a field hearing on student loan debt on May 8, 2013. "The unfortunate reality is that many private loans do not have the same affordable payment options as federal loans," he said.

Report topics. This report addresses:

1. how student loan burdens might impact the broader economy;

2. how distressed borrowers manage their student loan obligations;

3. what options currently exist for borrowers to lower their monthly payments on student loans;

4. successful alternate repayment programs in other markets and which features could apply to the market for private student loans; and

5. the most effective mechanisms for communicating with distressed borrowers.

Fact sheet. In conjunction with the report, the CFPB issued a fact sheet that provides highlights of the report. The fact sheet targets main topics such as the effects of private student loan debt on housing, small business development, retirement, and rural communities.

The fact sheet also includes solutions by policymakers and solutions that are market-based, including:

1. refinance options for responsible borrowers;

2. a “road to recovery” for borrowers in distress offered by lenders that provides a step-by-step process to lower monthly payments to match a reasonable debt-to-income ratio; and

3. a credit “clean slate” for borrowers in default where a borrower would work with the lender to come up with a payment plan intended to help the borrower get out of default.

MainStory: TopStory CFPB DoddFrankAct Loans

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