Student Loan Refi
NEW YORK (MainStreet)With more and more college graduates facing mounting high debt from student loans and worries it could hinder an economic rebound some are pushing for new rules to lighten recent graduates' loads.
In a recent report, the Consumer Financial Protection Bureau urges policymakers and lenders to jumpstart a stalled refinance market for private student loans allowing borrowers to take advantage of today's lower interest rates and improved their credit profiles and create opportunities for borrowers to repair their credit if they've fallen into default.
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"Everyone who cares about the future of this country should be focused closely on the many problems posed by a growing student loan debt burden borne by some of our best young people," said Richard Cordray, director of the bureau. "What is at stake is whether some of our most motivated and ambitious citizens who have the talent to make something of themselves, and lack only the means will be able to rise and form part of the future leadership of this nation."
That's why this issue is a big wake-up call for Americans. With an estimated $150 billion of private college loan debt hovering over graduates, the bureau has recommended to policymakers, as well as financial institutions, the possibility of offering "refi relief" for student loan borrowers who have shown an ability to make payments on time. This would allow borrowers to refinance their debt at market rates.
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"You think about it, and there should be a lot of refinancing going on," said Mark Kantrowitz, a student loan expert and publisher of Edvisors Network, a family of websites on planning for college. "Many of these graduates get out of college and get jobs. It takes a few years, but their credit improves and they should be eligible for better rates.The rates they are paying are out of sync with what they should be paying."
The bureau also proposed affordable payment options for borrowers in distress, where monthly payments are lowered to match a reasonable debt-to-income ratio, as well as a "credit clean slate" policy to allow borrowers to repair their credit and get out of default.
"These lenders want to avoid defaults," Kantrowitz said. "Some creative strategies from these institutions could help."
The bureau said such changes are necessary to make sure recent graduates can help drive large economic indicators such as the housing and auto markets as well as invest in small businesses. The National Association of Realtors recently said first-time homebuyers' market share of existing homes was 30% in February of this year, compared to historical levels of 40%.
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There also could be other more severe consequences, Cordray warned.
"The economic implications of student loan debt spill well beyond housing and small business development and into retirement savings as well," Cordray added. "Recent research revealed that only half of workers under 30 have enrolled in their employer's 401(k) plan and barely four out of ten contribute enough to receive a full employer match. We are concerned that those struggling with high student debt today will have no retirement savings to fall back on in the future."
While the proposals would help those in debt, banks and other financial institutions may not be in a rush to accept such changes.
"In these tough economic times, there are historic obstacles to repayment," said Richard Hunt, president and chief executive of the Consumer Bankers Association, in response to the report. "We share the concerns raised by [the bureau's] report and want to help troubled borrowers."
Hunt, however, added private loans should not be singled out.
"If we want to address the fundamental issues, the CFPB and other policymakers cannot turn a blind eye to the $850 billion in federal student debt and must address the underlying cost of higher education," Hunt said.
--Written by Chris Metinko for MainStreet