The federal Consumer Financial Protection Bureau is urging the creation of a market for the refinancing of private student loans, though how that happens remains to be seen.

“If these borrowers could refinance, their debt would be much more manageable,” the bureau’s director, Richard Cordray, said in remarks prepared for a public hearing on student debt in Miami. ” Given today’s historically low interest rates, there is a tremendous opportunity for lenders to take advantage of an underserved market.”

The bureau isn’t making specific recommendations. Rather, it’s urging lenders and policy makers to take up the issue, taking into account information the bureau has solicited from the public and from industry groups.

Private student loans — those made by nongovernment lenders — usually have higher interest rates and lack consumer protections, like flexible repayment options, available with federal loans. At the end of 2011, there were more than $8 billion in defaulted private student loan balances.

According to data cited in a new report on “Student Loan Affordability” released this week by the bureau, the student debt burden is probably having ripple effects on other parts of the economy, like causing young people to delay buying cars and homes and to avoid starting businesses.

Some of the burden could be eased, the bureau said, if borrowers could lower their monthly payments by refinancing their private loans at current, low interest rates.
“Most borrowers aren’t looking to get off the hook,” Rohit Chopra, the bureau’s student loan ombudsman, said Wednesday. “They just need a payment plan that works.”

He made his remarks in a telephone briefing about the report, which is based in part on thousands of comments the bureau received from the public and industry about student loans. The bureau solicited the comments earlier this year; they are available online.

The bureau is tasked with regulating private student loans. Federal loans are overseen by the Department of Education.

Rates on education loans tend to be higher than those for say, homes, because they are unsecured; if a borrower defaults, there is no collateral to limit a lender’s losses. But Mr. Chopra noted that after students graduate, find jobs and begin to establish a repayment record, their risk of default declines — and so they should become eligible for lower rates.

But the report noted that in comments to the bureau, lenders and industry groups cited some obstacles to restructuring or refinancing private student loans.

One hurdle to a robust refinance market cited by lenders, according to the report, is the cost of marketing to new customers. Student loans are typically marketed through colleges, but once students graduate, it is more difficult to efficiently identify potential customers, leading to higher “customer acquisition” expenses.

Lenders may also have to follow tougher accounting rules when seeking to modify such loans, which may make them cautious about doing so, especially since many are still handling the fallout of the financial crisis, the report noted.

How is the inability to refinance your student loans affecting you financially?

Article source: http://bucks.blogs.nytimes.com/2013/05/09/a-call-to-refinance-private-student-loans/?partner=rss&emc=rss