The Consumer Financial Protection Bureau is pushing for private student lenders and the government to help lower payments for borrowers after receiving thousands of complaints from consumers.

In a report released May 8, the CFPB called private student loans a potential “roadblock” to a borrower’s entire financial life which creates a domino effect on the economy.

The agency said student lenders should consider lowering payments for performing and struggling borrowers in addition to clearing credit reports for defaulted customers now on the rebound. The government should encourage student lenders to offer such refinancings, the CFPB said.

“Although there are signs that the housing market is recovering, we cannot forget that all of us were impacted by the meltdown, whether we personally took on a subprime mortgage or not,” said Rohit Chopra, the CFPB’s point-person on student loans, in a conference call with reporters. “While student debt may not pose that same sort of systemic risk to the financial system, it could be a drag on the recovery if borrowers can’t afford their payments and fully participate in the economy.”

The CFPB’s report calls for private student lenders to offer: “refi relief” to borrowers who pay on time; lower monthly payments for distressed borrowers; and an option to clean a defaulted borrower’s credit history once they begin paying a modified loan on time.

Student borrowers often receive a high interest rate on their private loan but the CFPB argues that the risk is lower after the borrower graduates and gets a job. The loan should be refinanced to a lower rate so long as the payments have been made on time, the agency said.

Likewise, the CFPB suggested lenders should lower monthly payments for distressed borrowers commensurate to “a reasonable” debt-to-income ratio.

“Given today’s historically low interest rates, there is a tremendous opportunity for lenders to take advantage of an underserved market,” said CFPB Director Richard Cordray in prepared remarks at a field hearing in Miami. 

The CFPB may be focusing on wrong target. The Consumer Bankers Association sent a letter to regulators in March stating that private student loans make up only 7% of originations compared to 93% for federal loans. The trade group asked for regulatory relief, largely on accounting for problem loans, so banks could modify struggling borrowers’ loans without taking an immediate hit to earnings.

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