3/01/2013 — 

WASHINGTON, DC – Calling the volume of private student loan defaults too large to be ignored, U.S. Senator Jack Reed (D-RI) joined with five of his colleagues today in calling for thirteen major banks to work with regulators and student borrowers to reduce the number of students in default on their private student loans.  The Consumer Financial Protection Bureau (CFPB) estimates there is over $1 trillion in outstanding student loan debt; of that, $150 billion is in private student loans.  To date, more than 850,000 students have defaulted on their private student loans worth more than $8.1 billion.

Rising tuition prices, a difficult economy, and questionable lending practices that are similar to the causes of the sub-prime mortgage crisis have resulted in more borrowers with greater amounts of student debt and more delinquencies and defaults. 

“We need the public and private sector to work together to prevent a calamity for middle-class students,” said Reed.  “I will continue working to make college more affordable, and I hope we can get everyone to the table to find workable solutions to controlling costs and reducing the debt burden for students and families.”

In the joint letter, the six U.S. Senators wrote: “The volume of private student loan defaults is too large to be ignored.  Constituents regularly contact our offices seeking assistance with repaying their student loans.  In many cases, borrowers report they want to continue making payments but their requests for a reduced monthly payment are denied by their lenders.  Without consumer protections and flexible repayment options…borrowers find it difficult to negotiate terms under which they would be able to avoid default on their private student loans.

“When a borrower defaults, no one benefits—the default adversely affects the borrower’s credit history and the lender must write-off the loan,” the Senators continued.  “Working with federal regulators, we urge you to provide borrowers with repayment options that will help reduce the number of private student loans in default.”

Other senators signing on to today’s letters include: U.S. Senator Dick Durbin (D-IL), U.S. Senator Tom Harkin (D-IA), U.S. Senator Al Franken (D-MN), U.S. Senator Elizabeth Warren (D-MA), and U.S. Senator Sherrod Brown (D-OH).

Unlike credit card debt or other loans, student loans are virtually impossible to liquidate, even after declaring bankruptcy.  Earlier this year, Senator Reed teamed up with Senator Durbin to introduce the Fairness for Struggling Students Act of 2013.  This legislation would restore fairness in student lending by treating privately issued student loans in bankruptcy the same as other types of private debt.

Today’s letter was sent to the following thirteen financial institutions that participate in private student lending: Sallie Mae, American Education Services, Citibank, Wells Fargo, JP Morgan Chase, ACS Education Services, KeyBank, RBS Citizens NA, Discover Financial Services, First Marblehead Corporation, PNC Bank, Sun Trust Bank and US Bank. 

The Senators also sent a similar letter to the Office of the Comptroller of Currency (OCC), Federal Deposit Insurance Fund, Federal Reserve, and the National Credit Union Administration, the regulators responsible for supervising private student loan lenders, urging them to offer clear guidance consistent with safety and soundness principles for private student loans that will provide flexibility to lenders working with borrowers to avoid default.

Text of today’s letters is below:

March 1, 2013

 

Dear [Lenders]:

 

Last year for the first time, student loan debt surpassed credit card debt.  The Consumer Financial Protection Bureau estimates there is over $1 trillion in outstanding student loan debt; of that, $150 billion is in private student loans.  To date, more than 850,000 students have defaulted on their private student loans worth more than $8.1 billion.  We urge you to work with federal regulators to provide borrowers with flexible repayment options consistent with safety and soundness principles in order to reduce the number of private student loans in default held by your institution.

 

Recent graduates face an improving, but still very difficult, job market.  One out of two recent graduates—approximately 1.5 million—are unemployed or underemployed.  Constituents regularly contact our offices seeking assistance with repaying their student loans.  In many cases, borrowers report they want to continue making payments but their requests for a reduced monthly payment are denied by their lenders.  Without consumer protections and flexible repayment options, such as, income-based repayment plans, provisions for discharge in the case of the borrower’s death or permanent disability, and forbearance or deferment options that are sensitive to the current job market, borrowers find it difficult to negotiate terms under which they would be able to avoid default on their private student loans.  Often times, flexible repayment options are only available after a borrower defaults and the loan is written-off.  However, when a borrower defaults, no one benefits—the default adversely affects the borrower’s credit history and the lender must write-off the loan.  Furthermore, borrowers cannot rehabilitate defaulted loans, leaving them with no viable options.

 

Does your institution work with borrowers to reduce the number of private student loans in default held by your institution?  If so, please respond to the following questions in writing by March 28th. 

 

1.            What options does your institution provide to borrowers who are having difficulty repaying their private student loans? 

2.            Does your institution provide options like income-based repayment plans, loan forgiveness, or extended forbearance that takes into consideration economic conditions such as high unemployment that may result in long-term unemployment for borrowers?  If no, why?

3.            Does your institution provide borrowers an opportunity to rehabilitate defaulted loans or modify the existing loan to reduce monthly payments?  If no, why?

4.            If your institution provides options to borrowers in order to avoid default, are these options available to all borrowers who contact your institution seeking assistance?  How does your institution ensure borrowers are aware of their options to avoid default?  Please detail the process borrowers must go through to obtain assistance to avoid default.

5.            What other steps is your institution taking to reduce the number of students that default on loans originated or held by your institution? 

6.            What steps is your institution taking to ensure students are knowledgeable about the terms of the loans and repayment plans? 

 

The volume of private student loan defaults is too large to be ignored.  Working with federal regulators, we urge you to provide borrowers with repayment options that will help reduce the number of private student loans in default.  Thank you for your consideration of this request and we look forward to receiving your response.  Should you have any questions, please feel free to contact Corey Tellez in Sen. Durbin’s office at 202-224-2152.

 

Sincerely,

March 1, 2013

 

Dear XX:

 

As the regulator responsible for ensuring private student loan lenders operate in a safe and sound manner, the Office of the Comptroller of Currency (OCC) should serve as an effective partner in reducing the number of private student loans in default.  We urge you to offer clear guidance consistent with safety and soundness principles for private student loans that will provide flexibility to lenders working with borrowers to avoid default.

  

Last year, for the first time, student loan debt surpassed credit card debt.  The Consumer Financial Protection Bureau estimates there is over $1 trillion in outstanding student loan debt; of that, $150 billion is in private student loans. To date, more than 850,000 students have defaulted on their private student loans worth more than $8.1 billion.

 

Recent college graduates face an improving, but still very difficult, job market.  One out of two recent graduates—approximately 1.5 million—are unemployed or underemployed.  Constituents regularly contact our offices seeking assistance with repaying their student loans.  In many cases, borrowers report they want to continue making payments but their requests for a reduced monthly payment are denied by their lenders.  Without consumer protections and flexible repayment options, such as income-based repayment plans, provisions for discharge in the case of the borrower’s death or permanent disability, and forbearance or deferment options that are sensitive to the current job market, borrowers find it difficult to negotiate terms under which they would be able to avoid default on their private student loans.  Often times, flexible repayment options are only available after a borrower defaults and the loan is written-off.  However, when a borrower defaults, no one benefits—the default adversely affects the borrower’s credit history, and the lender must write-off the loan.  Furthermore, borrowers cannot rehabilitate defaulted loans, leaving them with no viable options. 

 

Is the OCC working with private student loans lenders to reduce the number of students in default on their private student loans?  If so, please respond to the following questions in writing by March 28th. 

 

1.            What guidance is provided to lenders regarding private student loans?  Is the guidance designed specifically for private student loans?

2.            Does the guidance allow private student loan lenders to provide borrowers struggling to repay their loans flexible repayment plans? 

3.            Does the guidance take into consideration or allow private student loan lenders to take into consideration economic conditions such as high unemployment that may result in long-term unemployment for borrowers?

4.            Does the guidance allow for income-based repayment plans?  

5.            Has your agency evaluated the guidance it provides to determine the impact it has on the number of student loans in default?

6.            What specific steps are you taking to reduce the number of private student loans in default held by the lenders your agency regulates?

The volume of private student loan defaults is too large to be ignored and your agency can be an effective partner in addressing this growing issue by providing guidance that allows lenders the flexibility to assist borrowers at risk of default.   Thank you for your consideration of this request and we look forward to receiving your response.  Should you have any questions, please feel free to contact Corey Tellez in Sen. Durbin’s office at 202-224-2152.

 

Sincerely,