Patterns in the private student-lending industry are dangerously similar to those seen in the housing market prior to its collapse, according to a new study from the Consumer Financial Protection Bureau.
The study, completed with the Department of Education under a mandate in the Dodd-Frank Act, said the private student loan market—fueled by eased underwriting and investors interested in asset-backed securities—grew 185% between 2001 and 2008 to $20 billion.
Yet that market then deflated over the next three years, falling below $7 billion in 2011. Outstanding private student loans now total about $150 billion, compared with $864 billion in federal student loan debt.
"Many students have taken out loans from private banks which we know have been issued in a way very similar" to loans "in the subprime lending crisis," Education Secretary Arne Duncan said in a conference call with reporters in advance of the study's release.
The two agencies said private loans have proven riskier for students than federal ones, and borrowers struggling to repay their debt find few workout options. They suggest a potential remedy—a recommendation sure to raise eyebrows in Congress—is to consider allowing student loan borrowers more ways to restructure credit while in bankruptcy.
"Our findings reveal that students were yet another group of consumers that were hurt by the boom and bust of the financial crisis," CFPB director Richard Cordray said during the call. "Too many student loan borrowers were given loans they could not afford and sometimes for more money than they needed. They're now overwhelmed by debt and regret the decisions they made."
The study included data collected from nine lenders covering more than 5 million loans that were originated between 2005 and 2011. Additionally, five nonprofit lenders also submitted data. The participants included RBS Citizens NA, Discover Financial Services, The First Marblehead Corp., JPMorgan Chase, PNC Bank, Sallie Mae Inc., SunTrust Banks Inc., U.S. Bank National Association and Wells Fargo Bank NA.
