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February 21, 2013 7:59 pm
US regulators raised the possibility of allowing students to refinance or ease terms on their loans, as policy makers warn that growing student debt is hurting consumption and future credit creation.
The Consumer Financial Protection Bureau launched a consultation on Thursday on how to facilitate increased debt writedowns and refinancings for the millions of US borrowers who collectively carry some $150bn of private student loans.
The call for action follows warnings that student debt levels are holding back the US economy. Car purchases, home buying and credit card balances for those under 35 years of age have all decreased as overall student debt has surged to $1.1tn, according to new data from the Pew Research Center and the CFPB.
The US Office of Financial Research has identified student debt as a potential threat to financial stability, warning that it could significantly depress demand for home mortgages and dampen consumption.
“Too many private student loan borrowers are struggling with unwieldy debt that prevents them climbing the economic ladder,” said Richard Cordray, CFPB director. The agency plans to make recommendations “that might help avoid a repeat of the mortgage meltdown for today’s student loan borrowers”.
The CFPB warned that student debt levels might call in to question “whether young, debt-burdened graduates will enjoy a retirement like previous generations of Americans”.
The Federal Reserve Bank of New York, US Treasury and Financial Stability Oversight Council are examining the links between student debt, the economy and financial stability.
The CFPB said: “Should these risks be significant, policy makers may wish to consider partnerships between the federal government and the private sector to increase the availability of alternative repayment options and reduce levels of delinquency and default.”
Rohit Chopra, the CFPB official responsible for student loans, said: “If you think everything in this market is hunky-dory you are completely missing all the warning signs. Many of us have raised questions about the student debt domino effect on the economy. We need to take action.”
The consumer bureau’s consultation is the first step towards potentially forming a more robust market for refinancing of high-interest rate private student loans and debt workouts.
“There has not been a consistent set of options for private student borrowers to manage tough economic times,” Mr Chopra said. “Those who have graduated and gotten good jobs wonder why they are not able to refinance those loans and take advantage of today’s historically low rates.”
The agency has said US borrowers with non-government backed student loans are “trapped” paying higher rates than necessary. The average rate on new student loans during the past three years was 8 to 10 per cent, according to the CFPB.
Mr Chopra said debt renegotiations that lower monthly payments probably would decrease defaults.
Companies that could be affected include Sallie Mae, the largest US student lender with $181bn in assets.
Patricia Christel, Sallie Mae spokeswoman, said: “We believe our practices are consistent with the CFPB’s vision.”
Last month, John Remondi, the company’s president and chief operating officer, told investors that Sallie Mae’s margins “are really a function of alternative financing opportunities”.
“If you think about our products, we’re making loans to parents and students, family education loans. Their alternatives are fairly limited,” Mr Remondi said.
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