Subprime Practices of Student Loan Lenders Might Not Mean Settlement

In the years immediately before the financial crisis, private student loan lenders exhibited similar practices to subprime-mortgage lenders that were determined to have played a major role in the housing market meltdown, according to a report by the Consumer Financial Protection Bureau and the U.S. Department of Education.

Private lenders bypassed college financial aid offices, marketing directly to students, loosened their standards for issuing loans and didn’t clearly explain to students the terms of their loans and whether students were still eligible for more government-backed federal loans, says the report released Friday (July 20).

“Subprime-style lending went to college and now students are paying the price,” U.S. Education Secretary Arne Duncan said in a statement.

Whether private lenders will have to pay any price for their actions remained to be seen. While bureau officials repeatedly compared private student lenders to subprime-mortgage lenders in a call Thursday with reporters, they stopped short of saying whether those private lenders had done anything illegal.

In February, state attorneys general across the country reached a $25 billion settlement with five major banks after an investigation into their mortgage practices. Similar efforts aren’t underway yet with private student lenders, according to the National Association of Attorneys General, and might not ever happen, according to some experts.

“It takes a very different shape than what was happening in the mortgage industry,” says Chris Lindstrom, higher education program director for the U.S. Public Interest Research Group, a consumer advocate organization.

Lindstrom’s group has previously campaigned against some private lending practices, and she is optimistic that some of the report’s recommendations would improve the industry and student debt issues, if adopted, particularly its call for requiring colleges to certify all loans.

The report indicates that requiring colleges to certify that private loans aren’t larger than necessary would help keep students from borrowing more than they can afford to repay. It also suggests rethinking current bankruptcy laws that make it nearly impossible for students to discharge private student loans through bankruptcy.

The banking industry criticized the findings for not including comparable information about federal student loans, which make up the majority of the market, saying that federal loans have less extensive borrower disclosures than private loans.

“The report does not provide a complete, clear and objective analysis of the student lending market,” Richard Hunt, Consumer Bankers Association president, said in a statement.

Currently, about 15 percent, or $150 billion, of all outstanding student loans are private federal loans, according to the report. The volume of private loans increased rapidly in 2007 and 2008, leading up to the recession, according to the report, and declined dramatically after. While it has still not returned to pre-recession levels, the market for private student loans has started to slowly increase again, according to the report.