A recent report by the Consumer Financial Protection Bureau highlights several issues with private higher education loans, some of which resemble those that surrounded subprime mortgages. According to the report, private student loan volume spiked from $5 billion in 2001 to $20 billion in 2008 before shrinking to $6 billion in 2011. It now represents $150 billion of the approximately $1 trillion in outstanding student loan debt.
The bureau attributes the increase in part to lenders loosening their underwriting standards from 2005-2007, resulting in students borrowing more than they needed for their educational costs and loans to borrowers with lower credit scores. The report also pointed to a robust market for securitizing student loans. Because securitization relieved lenders of ensuring the loans’ repayment, it incentivized increasing loan volumes rather than evaluating borrowers’ creditworthiness.
The bureau noted improvements in private lending since 2008, including increases in the percentages of private loans cosigned and in the percentage certified as necessary by the college or university. However, it also reported that borrowers from the previous decade may face greater repayment challenges, as private loans typically do not offer the same repayment flexibility as federal loans (e.g., income-sensitive repayment plans, forbearance, rehabilitation program, etc.).
