Student Loan Market Headed for Crisis, CFPB Warns

November 19, 2013
American Banker 
student loan news

The student loan market lacks the data and regulations that could prevent another financial crisis, according to Rohit Chopra with the Consumer Financial Protection Bureau. Addressing the Federal Reserve Bank of St. Louis this week, Chopra called it “irresponsible" for financial watchdogs to avoid actions that would shield the market from a collapse and recommended several options that do not need congressional intervention -- including requiring lenders to disclose more data and implementing policies to encourage student loan refinancing.

About 40 million Americans have a total of $1.2 trillion in student debt outstanding, with each borrower holding an average of $30,000 in debt, according to the CFPB. As debt increases, wages for recent graduates are declining. And younger graduates struggling to pay down student debt may find it more difficult to get approved for a mortgage, which could further hamper housing recovery. Chopra recommended several other options, such as having institutions that securitize student loans in the secondary market retain 5 percent of the risk and having lenders make a “good faith effort” to ensure that borrowers have the ability to repay. As in the mortgage market, Chopra voiced concern about the lack of incentive for servicers to place struggling borrowers in a modification program but also acknowledged the difficulty in analyzing the default rates and success of modification programs.

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