CFPB Report Elicits Misleading Response From The Banking Industry
In light of the recent Consumer Financial Protection Bureau (CFPB) report highlighting complaints from struggling student-loan borrowers, the banking industry is promoting the assertion that private student loans have a significantly lower default rate than federal student loans.
In essence, they are carelessly misleading students to believe that private loans are safer than their federal counterparts. Not only is this untrue, but it is dangerously deceitful and could bring about serious consequences for the more than 40 million borrowers with more than $1.2 trillion in student loan debt.
Consumer Bankers Association General Counsel, Steve Zeisel said that “with a sustained and incredibly low default rate of less than three percent, private student loans far outperform federal loans, which have default rates over 14 percent.”
This comparison is deceptive because the banking industry is comparing private student loan charge-off rates to federal student loan cohort default rates.
But what’s the truth?
A charge-off rate determines the dollar value of loans in which consumers are 120 days late in their repayment. A cohort default rate measures how many borrowers who entered repayment have defaulted within a period of three years.
These are not the same rates, and data currently available does not allow for a relevant or meaningful comparison between federal and private student loan default rates.
Instead of the banking industry pushing back against the recent CFPB report, they should be advocating for greater transparency within the private student loan industry so that borrowers can better understand the trends.
What does this mean for you?
Currently, millions of student-loan borrowers are struggling to make their monthly student loan payments. In an unpredictable economic climate, it would be unwise to suggest that private student loans provide a safer option than federal student loans. Private student loans typically charge higher interest rates, require co-signers, and are void of the varying consumer protections that have become standard in federal student loans—they are riskier to take out along with a greater chance of default.
In general, private student loans have uncapped interest rates that can vary month to month; however, this is not the circumstance for federal student loans.
With a private loan, a borrower could start off with low interest rates and discover later that their payments have significantly increased. Private lenders typically charge higher interest rates to those with significant financial need, while federal lenders offer the same terms to all borrowers in a given year.
If you become unemployed, private lenders do not offer deferment options, but federal lenders do.
If a borrower dies or is permanently disabled, private loans generally are not discharged, yet federal loans can be discharged.
For recent graduates lucky enough to secure an entry-level position with an income of $35,000 a year, federal loans offer repayment based plans on that income, while private loans lack these crucial flexible repayment options.
Additionally, Congress has a significant role to play. Our elected officials need to expand bankruptcy protections and allow borrowers to refinance their student loans (both federal and private).
If it’s a decision between a federal or private student loan, the federal loan wins hands down. They provide greater consumer protections and are generally more understanding of the oppressive economic climate facing Millennials.
The private banking industry is attempting to distract borrowers from the messy and unforgiving state of private student loans. Millennials see right through these tactics and will not be fooled by the private banking industry.
This post was written by Sheila E. Isong, Policy Manager at Generation Progress. Read the original here.
Posted on 17 October 2014
|Generation Progress is a national organization that works with and for young people to promote progressive solutions to key political and social challenges. Generation Progress engages a diverse group of young people nationwide, inspires them to embrace progressive values, provides them with essential trainings, and helps them to make their voices heard—and to push policy…|
|Visit Website||Follow @genprogress|