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.
Such a requirement could itself be a roadblock to securitization of private student loans, which have recently regained a following among investors.
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 late Wednesday. "Some people noted in their comments that a robust refinance market for private student loans could provide a break for consumers who have better credit than when they first borrowed and now deserve to have a fair shot at qualifying for lower interest rates."
Cordray said the agency is concerned that the "unmanageable student loan debt may be harmful to recovering consumer markets and may be dragging down borrowers' lives."
The CFPB report was released the same day that Sen. Elizabeth Warren, the founder of the agency, introduced a bill that would allow federal student loan borrowers whose interest rates are set to jump July 1 to receive a rate that matches what big banks get through the Federal Reserve discount window