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No forgiveness with private student loans

Thursday, January 10, 2013
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Last month, lawyers representing two providers of so-called private student loans — money for college not lent nor guaranteed by the federal government — were busy in local courts, seeking default judgments against allegedly delinquent borrowers.

In Schenectady County, four lawsuits were filed in one day against a Niskayuna man, claiming he owed a combined $81,000. In Greene County, three complaints were lodged on a Friday against an Athens woman; the following Monday, three more were filed against another woman. The same co-signer was listed on both women’s complaints, and she was potentially on the hook for more than $105,000 for the six private loans.

Courts in Saratoga, Fulton, Montgomery, Albany, Washington and Rensselaer counties each saw a handful of complaints last month, too, with the claimed deficiencies ranging from just over $1,000 to more than $50,000.

Nationwide, an estimated 850,000 private loans like these, totaling some $8 billion, currently are in default, according to a report from the Consumer Financial Protection Bureau.

You may remember the agency as a byproduct of the Dodd-Frank reforms put into place after Wall Street’s near-meltdown in 2008. Championed by Elizabeth Warren, Massachusetts’ newly elected U.S. senator, the bureau has within it an ombudsman’s office, and within that a person who keeps an eye on private student loans.

The agency reported that overall student loan debt hit $1 trillion in 2012, surpassing credit cards as the largest source of unsecured consumer debt in the United States. Private loans comprise about $150 billion of the total.

Such loans are made by financial companies like banks and credit unions, state-affiliated and nonprofit agencies, and sometimes schools themselves. But unlike the bulk of college loans — which are made or guaranteed by the federal government — private loans don’t offer deferments or forgiveness for borrowers. And in the slow recovery that followed the Great Recession, a tough labor market means new graduates may have trouble staying current on private loans, especially when they’re eating up a big chunk of meager earnings.

The ombudsman for private student loans, in an annual report to Congress in October, likened the complaints fielded by the office in 2012 to those heard from mortgage borrowers just before the housing bubble burst: lost paperwork; changes in terms when loans and servicing rights were bought and sold; inability to modify a loan; aggressive debt-collection practices.

“[T]he breadth of potential servicing errors and the inability to easily modify a loan bear an uncomfortable resemblance to experiences faced by homeowners in the mortgage market,” wrote the ombudsman, Rohit Chopra. And the problems they highlight provide “a clear reminder that low-quality servicing practices for large consumer credit markets can harm both consumers and the economy more broadly.”

One of the report’s recommendations to Congress was to find ways to encourage the development of refinancing or loan-modification options for borrowers with private loans, similar to those found in federal student loan programs.

“The inability to modify or lock in lower rates might impede student loan borrowers from participating in more economically productive endeavors, such as household formation or small-business creation,” the report said, citing figures showing a bump in young adults moving in with their parents rather than buying homes because they’re strapped by college debt.

“Given the severe impacts that defaulting on student loans can have on young consumers, policymakers might consider identifying potential opportunities for … helping student borrowers emerge from financial distress.”

Marlene Kennedy is a freelance columnist. Opinions expressed in her column are her own and not necessarily the newspaper’s. Reach her at marlenejkennedy@gmail.com.

 
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