NEW YORK (MainStreet) The private student loan market, which is a fraction of an overall market dominated by federal loans, is poised to expand following a shake-out during the 2008 financial crisis. Sallie Mae, Wells Fargo and Discover Financial are some of the student lenders that are exhibiting strong growth in a spiking interest rate environment, where rising rates on federal loans are tied to rates on U.S. Treasury bills.
Private lenders do not extend the same protections available in federal loans. Income-based repayment programs are not available, and private loans come with variable interest rates that penalize borrowers with limited means. Private lenders account for roughly 7% of all loans, with the market estimated to be worth about $165 billion.
Meanwhile the Consumer Financial Protection Bureau appears to be making a significant difference for student borrowers jammed up by these loans. It has helped 330 people of the 4,311 who made Web-based complaints receive monetary compensation. The median amount of relief was $700, and maximum relief was over $75,000. More than 500 people got some form of non-monetary relief.
These were some of the findings contained in the U.S. Public Interest Group's report on private student loans based on complaints made to the Consumer Financial Protection Bureau's Website. The report, "Private Loans, Public Complaints," was released this morning and is based on data culled from the CFPB's Consumer Complaint Database. Consumers log in to the CFPB's Website to lodge their complaints, which are tracked by the CFPB based on how they are resolved.
Chris Lindstrom, U.S. PIRG's Higher Education Program director, was effusive in her praise for the CFPB complaint data base. "They are leveling the playing field for the aggrieved borrower," she said "A year and a half ago, if you're were having problems with your lender, if you were trying to work out a modification and the lender was completely unresponsive, you literally had no recourse. Now you can log in a complaint at the CFPB's Website. The CFPB will actually get in touch with your lender, give you a case number and advocate on your behalf."
"As an example, we're able to go to their Website and use their data to do this report that details complaints on a state-by-state basis," she continued. "That lets us determine which private lenders are the most complained about. This is the first time we've been able to see this information."
Some of PIRG's findings were unremarkable while others were surprising. Sallie Mae, with an estimated 50% share of the private student loan market, drew the most complaints from CFPB users, although its share of total complaints to the CFPB was lower than its market share.
"Sallie Mae is a behemoth in the market place so you expected that they'd have a lot of complaints," said Lindstrom. "But we've also found that the Pennsylvania Higher Education Assistance Authority, the PHEAA, is the second-most complained about lender behind Sallie Mae. Here is this state-based non-profit, now becoming the second most complained about lender in 28 states. Who knew?"
Following Sallie Mae and PHEAA on the complaint hit parade are Wells Fargo, Citibank and Discover. Citibank began selling its student loan assets to Sallie Mae, Discover and the Department of Education in 2010.
Repayment of loans, including fees, billing, deferment, forbearance, fraud and credit reporting were the most common reason for complaints filed to the CFPB. Nearly 65% of the complaints concerned loan repayment.
A market dynamic covered in the report concerns projections for the cost of college, which is rising faster than the availability of aid. "If we stay on those current projections, more and more people are going to turn to private lending," Lindstrom said, noting this to be especially the case if the federal well starts to run low.
The problem, as she and others have said, concerns the bang for your buck; you just won't get as much as you will with a federal loan.
U.S. PIRG did have some suggestions for the CFPB that it believes will lead to improvements. Included were the implementation of consumer protection rules that would protect student loan borrowers from predatory practiceswhich itself assumes that some student loans and lending practices are indeed predatory, a touchy subject in the student loan industry. PIRG also recommends that colleges and universities certify the safety and quality of private student loans before encouraging students to borrow.
--Written by John Sandman for MainStreet