AFR in the News: Private Student Loan Debts Highlight Need for Fully Operational CFPB

AFR in the News: Private Student Loan Debts Highlight Need for Fully Operational CFPB

The Institute for College Access & Success and Americans for Financial Reform hosted a conference call with reporters and bloggers on Tuesday, October 25th to discuss private student loan debt and the impact of delaying the confirmation of a Consumer Financial Protection Bureau Director on students and families.

The call featured three student loan borrowers – Stephanie Holstein of Missoula, MT, Cheri Parrag Sarasota, FL, and Valisha Cooks of Los Angeles, CA; Pauline Abernathy, Vice President, The Institute for College Access & Success; and Lisa Donner, Executive Director, Americans for Financial Reform.

Excerpts of remarks from participants:

Lisa Donner, Executive Director, Americans for Financial Reform:

AFR is a coalition of more than 250 organizations, including civil rights, labor, community and faith based groups, seniors, consumer advocates, small business, and economists and other policy experts working together towards the goal of a financial system that does a better job serving the needs of the real economy, including providing sustainable loans for education.

Private student loans are a very risky way to finance an education; they have higher interest rates, and come with fewer protections for borrowers than federal loans. And yet despite this, a majority of private loan borrowers end up in these riskier loans before they have exhausted all their opportunities to use fairer federal loans, or even sometimes before they have taken out any federal loans at all. Taking out loans to further your  education should not be an unsustainable trap, but that¹s what happens too often now.

The creation of the CFPB, and the mandate that the consumer bureau regulate and supervise private student lending, has created a major new opportunity to address deceptive and unfair practices. There are important steps the CFPB can and should take with the authority it has now to help students guard and against tricks and traps. But there are also key problems that cry out for attention that the CFPB is not able to take on until it has a Director in place. This is one of many reasons we think its so important that the CFPB be allowed to do what the law requires, and that the Senate act on General Cordray’s nomination as Director so it is able to do so.

Pauline Abernathy is vice president of The Institute for College Access & Success, an independent, nonprofit policy organization that works to make higher education more available and affordable for people of all backgrounds and studies the impact of student debt on families, society and the economy.

 Stephanie Holstein and her husband and two children live in Montana. She continues to struggle with the consequences of private student loans she took out for her undergraduate degree.

 Cheri Parrag and her family live in Florida, and are likewise wrestling with the challenges of private student loans.

 Valisha Cooks first attended community college, and then finished her studies at a for profit college.  She lives in California and is experiencing the sharp differences in rules and consumer protections available for private as opposed to federal loans.

Pauline Abernathy, Vice President, The Institute for College Access & Success:  

Private student loans are not a form of financial aid any more than credit cards are.  Like credit cards, they mostly have variable interest rates that are highest for those who can least afford them. They typically have uncapped interest rates and offer little or no payment flexibility. But unlike credit card debt, they are not dischargeable in bankruptcy. The terms and conditions of private student loans contrast sharply with those of federal student loans, which offer fixed interest rates and a tremendous range of repayment options, including income-based repayment which allows the borrower to repay their loans as a share of their income. And the payments can be as little as zero if the borrowers’ income is low enough. There’s also forgiveness for a variety of reasons including public service loan forgiveness, and economic hardship deferment if people lose their jobs as well as death and permanent disability discharges.

The three borrowers you are going to hear from today have unique stories, but they have several things in common, which are very common among private student loan borrowers.

1)     They didn’t appreciate the difference between a federal student loan and a private student loan and in some cases they aware actually told that there was no difference. We hear that time and time again.

2)     All of them had nowhere to turn when they did encounter problems with their private loans and came to see the differences between private and federal student loans. With the Consumer Financial Protection Bureau, there will now be a place for people to turn, particularly the Private Education Loan Ombudsman office mandated by statute.

3)     They all have both federal and private student loans, which is also very common. They have been able to make their federal loan payments manageable by taking advantage of income-based repayment, but that contrasts sharply what they will tell you about their experiences with private student loans – and again that is very common and typical.

4)     At least two of them had co-signers on their private student loans, which is also very common now with private student loans – 80% to 90% private student loans made today require a co-signer — and in each case, both the borrower and the co-signer learned only after the fact what the consequences were for both the co-signers’ and borrowers’ credit. And that again is a common refrain.

Stephanie Holstein
Missoula, MT

Stephanie was her high school’s valedictorian and student body president, and attended the University of Notre Dame. She didn’t want her single mother to have to borrow federal Parent PLUS loans, so she relied on the advice of her college financial aid office, which recommended variable-rate private student loans through its partnership with Citibank. No one told her that her mother’s credit would be affected by co-signing her private student loans. Stephanie graduated with more than $70,000 in student debt, including $40,000 in private loans. She said, “My mom didn’t go to college and my school’s financial aid office was the only place I could turn for advice. They made the private loans sound like a great deal.” Had she known the risks of private loans, she says that she would have relied on Parent PLUS loans instead and paid them off herself.

“Private loan debt is worse than a credit card. The rates jumped every three or four months in the first few years – my payments just kept going up.” To keep up with her rising private loan payments, she accrued more than $17,000 in credit card debt to cover basic expenses and medical bills. She was able to manage her federal loans by researching all the repayment options, ultimately enrolling in Income-Based Repayment when it became available in 2009.

Now married and the mother of twins, Stephanie has paid off her credit card debt through careful budgeting. But she and her husband determined that they would never be able to pay off her private student loan debt without significantly higher earnings. To increase their earnings, she is now pursuing a law degree while he gets a PhD in mathematics. Stephanie and her husband are taking on more student debt for graduate school, but they’ve vowed to never take out another private student loan. They do not own a home and have no other debt.

Stephanie knows firsthand how difficult it can be to work with private student lenders. When she switched banks, her lender cancelled the minor interest-rate discount she got for making on-time payments through direct deposit.  The added cost was immediately capitalized, and she had to fight tooth and nail to get the lender to recognize that she was still using direct deposit at her new bank and to cancel the unwarranted charges.  Stephanie says their goal is to pay down the private loans just as fast as they can before the rates rise again.

Meanwhile, her mother has had extreme difficulty in obtaining a mortgage because she cosigned Stephanie’s private loans, even after eight years of on-time payments.

Cheri Parrag
Sarasota, FL

Cheri came from a very low-income family and was the first in her family to go to college.  She went to NYU, her dream school, trusting that attending a prestigious university would open the doors to a successful future. Prior to her freshman year, both of Cheri’s parents filed for bankruptcy, making them ineligible for federal Parent PLUS loans. When grant aid and work-study did not cover the full cost of college, she took out federal loans as well as private loans, on the recommendation of the school’s financial aid office, which did not make all the differences in terms and costs clear.  She graduated in 2005 with $30,000 in federal loans and $100,000 in private loans co-signed by three different family friends. No one told her or the co-signers how these loans would affect their credit scores.  While she never missed a payment and has maintained excellent credit, she met with opposition when she first tried to release her co-signers, although she was eventually able to do so after considerable effort. 

Married in 2009, Cheri and her husband found themselves struggling as newlyweds. They moved in with her father when they faced a stint of unemployment. Worried about her outstanding debt, Cheri began to look into repayment options. She was thrilled to learn about the Income-Based Repayment program, which became available for federal student loans in 2009. She began to understand the stark differences between her federal and private loans when she realized that private loans are not covered by IBR or the other repayment plans, forgiveness programs, and consumer protections that come with federal loans.

Two years later, Cheri considers herself lucky to have found a good job with a decent salary, but she cannot save for retirement or more than a month of emergency expenses because of her private student loan debt.  She calls renting an apartment with her husband the only “luxury” in her life. She is frustrated at not having any retirement savings, and is worried about when they will be able to afford to have children.

Cheri considers private student lenders predatory, relying on the naiveté of young adults who don’t realize how this risky debt can affect their options later in life. During her early struggles to find a good job, Cheri used up the limited forbearances available for her private loans, for which she had to pay an additional fee. She says, “What if I lose my job or get sick and can’t make my private loan payments or if interest rates start rising again?  I have no options left and no way out – not even bankruptcy.”

Valisha Cooks
Los Angeles, CA

Believing she would be better off financially with a college degree, Valisha first attended a community college and ultimately graduated from a for-profit college.  Although she was working while she was in school, tuition was expensive and after taking out as much as she could in federal loans, the financial aid office informed Valisha that she could either take out private student loans or drop out. She was steered towards a private lender and told it was just like a federal loan.  It was only when her interest rates rose .5%-1% every month that she realized these were not the same as federal loans, but it was too late.

Valisha graduated with $41,000 in federal loans and $36,000 in private student debt.  After just 3 years, the private lender had tacked more than $16,000 onto the principal balance.  She got a job at UCLA as an Education Coordinator and when she became pregnant, applied for forbearance on her loans.  She was accommodated immediately by her federal lender, but had to repeatedly resend her information to her private lender for months, until her request was finally approved.

Even though she thought her private loans were in forbearance, collection agents started calling her from 5am to 9pm. They said they didn’t know anything about her private loans being in forbearance.  During this time Valisha also had $10,000 in credit card debt, medical bills, and a car payment, and filed for bankruptcy, knowing that she would never be able to pay back that debt on top of her student loans.  Although she attempted to include her private student loans in the bankruptcy, they were not discharged.

Valisha has been able to take advantage of the Income-Based Repayment program, which makes her federal loan payment affordable, but her private lender refused to lower her monthly payment to an affordable amount and her private loans went into default.  After years of back-and-forth with her private lender, Valisha was able to negotiate a reduced payment plan for half a year, setting up automated payments which were deducted directly from her bank account. After the six-month mark, Valisha never heard from her lender about the status of the loan and continued to make the negotiated payments.  It was not until she applied for credit from her bank that she learned that the lender had written-off her private student loan and sent it to a collections agency.

“First of all, there’s nowhere to go. There’s no one place where I can go to for information directly on the subject of private student loans and refinancing them. You could basically Google anything like ‘how-to build a fireplace’ and you could find clear-cut directions on how to do it. But to figure out how to pay these student loans and navigate the best way and most practical way it took hours upon hours upon days of research just to get the answer that there is no help. There’s no where I can go and nobody has successfully navigated the system and mapped out the way and is sharing it with the world – there’s no help.”

Press Coverage:

No CFPB Director Means More Money Problems For Students
Mandi Woodruff (Business Insider)
October 25, 2011

“As members of Congress dance around affirming President Obama’s nominee to head up the new Consumer Financial Protection Bureau, students are among those that stand to be hit the hardest, some groups say. 

 Without a leader, the agency can’t fully regulate consumer practices across all sectors, including private student lenders, according to The Institute for College Access & Success. … The CFPB would be instrumental in enforcing these regulations and collecting data on institutions that are funneling students to private lenders, but it can’t do so until a new director is appointed, according to Lisa Donner, executive director of Americans for Financial Reform…‘Without a director in place…it’s just that much harder to do the job of standing up for consumers and standing up to industry specialists,’ Donner said.” Click here for more.

Officials target college financial aid letters
Candice Choi (AP)
October 25, 2011

“Financial aid award letters can be misleading. In one common practice, for example, colleges highlight the total ‘out of pocket’ cost for attending. The figure is intended to give students an estimate of how much they’d have to pay after outright awards, such as grants and scholarships are factored in. …On Tuesday, the Consumer Financial Protection Bureau and the Department of Education announced a plan to simplify the aid letters so that families can assess a school’s true cost and make comparisons more easily. Officials are asking for feedback on a draft of the form, available at, …The push to standardize financial aid award letters comes at a time when student loan volumes have reached record levels. The Institute for College Access & Success estimates that two-thirds of graduates have student loans, with an average debt of about $24,000.” Click here for more.

Obama To The Rescue On Federal Student Loans, But What About Private Loans?
Eva Pereira (Forbes)
November 1, 2011

“Obama’s new studentloanreliefplan makes federal debt burdens manageable, but what’s to be done about private debt? A sizeable chunk of education debt is owed to private lenders, who charge far higher interest rates and promise none of the borrower protections that come with federal loans. As of 2010, there’s an estimated $168 billioninoutstandingprivateloans. The new Consumer Financial Protection Bureau (CFPB) aims to make the education lending market much more transparent with its KnowBeforeYouOwe project, but for those already knee deep private debt, there is little recourse.  Several distressed borrowers shared their private loan struggles on a recent call organized by the AmericansforFinancialReform, a consumer rights coalition. All were first-generation college students from either single parent or low-income families, who turned to private loans to cover costs for their college education. ‘My mom didn’t go to college and my school’s financial aid office was the only place I could turn for advice. They made the private loans sound like a great deal’ said Stephanie Holstein. … Cheri Parrag from Sarasota, FL took out $30,000 in federal loans and $100,000 in private loans to attend her dream school, NYU. At the time, her parents had just filed for bankruptcy, making them ineligible for federal Parent Plus loans. She turned to private lenders to cover the remaining costs. … Valisha Cooks from Los Angeles, CA took out $41,000 in federal loans and $36,000 in private loans to finance her college education. She started at community college, eventually graduating from a for-profit college. As the first woman in her family to attend college, she says, ‘I had no guidance growing up. I relied heavily on the financial aid office to tell me how I was supposed to pay for it.’” Click here for more.

For struggling graduates, help with student loans
Candice Choi (AP)
November 3, 2011

“There’s a legitimate way to shrink those student loan payments. In coming weeks, the most recent crop of graduates will start receiving their monthly bills as the six-month repayment grace period comes to an end. That’s likely causing anxiety for those still struggling to get their careers off the ground. To help ease the financial distress, federal education officials in recent weeks have been raising awareness about an underused program intended to lessen the burden for borrowers who don’t earn a lot. The program, called Income-Based Repayment, captured the national spotlight when President Barack Obama announced a plan last week to speed up a law that will make it more forgiving.” … Stephanie Holstein, who graduated from the University of Notre Dame eight years ago with $30,000 in federal loans, says the program was an enormous help at a time in her life when money was tight. When she applied two years ago, she and her husband had just had twin daughters. She was only working a few days a week and he had his own business; their combined income was about $35,000. That enabled Holstein to have her monthly payments waived. ‘For people who are just out of college and starting at the bottom, it’s a huge help to have a payment that matches what’s going on in your life,’ said Holstein, now 31 and living in Missoula, Montana.”  Click here for more.

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