Private Student Loans Are A Tiny Part of the Debt Problem

The Consumer Financial Protection Bureau, the newly-created agency in charge of protecting the interest of consumers and promoting fair business practices, announced last week that it will begin to investigate private students loans, which represent $150 billion worth of student debt.

It’s probably about time to start thinking about refinancing options for private loans, but this effort is unlikely to have much impact on the real student debt problem. According to the CFPB:

Today, the Consumer Financial Protection Bureau (CFPB) announced that it is gathering information to develop options for policymakers to make repayment of private student loans more manageable for struggling borrowers. The CFPB has found that private student loan borrowers who wish to pay their loans, but face high payments, lack alternative repayment and refinance options.

In October 2012, the CFPB Student Loan Ombudsman released a report noting that consumers had trouble negotiating affordable repayment plans with their lenders and servicers for private student loans – loans that are not designed with income-based payment options.

The CFPB plans to explore more detailed recommendations to policymakers in order to facilitate greater repayment affordability of private student loans.

The CFPB is still in the “gathering information” stage but this project is potentially important because, as CFPB Student Loan Ombudsman Rohit Chopra said, “If you think everything in this market is hunky-dory, you are completely missing the warning signs. Many of us have raised questions about the student debt domino effect on the economy.”

He’s right, but there’s not much the CFPB can really do about this. It’s true that private student loans are more likely to have onerous terms for borrowers. The repayment options for private student loans don’t have the same protections as federal students loans, which means that consumers can be hurt a great deal as a result of their private loans.

But there’s no indication that fixing the rules for private student loans (or even, frankly, zeroing them out altogether) would have much impact on student finances. That’s because private student loans are a very small part of the education debt problem. The federal government owns some 85 percent of student loans. Only 15 percent of student loans are privately held.

It’s true that as a consumer protection agency the CFPB is right to target the one part of student debt that is consumer based. But if the point is to really impact the debt problem, this will do little.

Targeting private student loans in an effort to address “the student debt domino effect on the economy” is sort of like trying to fix climate change by focusing only on the carbon emissions of Europe. Yes that would be a smart way to simulate major effort, but the ultimate impact on the problem would be minimal.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer