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CBA Letter to Secretary Duncan Regarding Private Student Loans
Dear Secretary Duncan,
The Consumer Bankers Association (CBA) and its members are strong supporters of higher education and recognize the tremendous value a degree can provide. While a small part of the overall market, our member banks in the private student loan business stand ready to assist students and families address their higher education financing needs. As President Obama has highlighted, we must work to lower the cost to attend college.
Like many Americans, financial institutions involved in the private student loan market share the concern of the Department of Education and the Consumer Financial Protection Bureau (CFPB) that many student loan borrowers are having difficulty in repaying their student loans. It is in this context the Consumer Bankers Association (CBA) would like to express concern with a statement you made last week:
“Federal student loans remain the best option for borrowers, but we know some students have turned to private student loans and are struggling to repay.”
A comparison of the current terms of some federal student loans and private student loans suggests that for many student and parent borrowers, a private student loan may be a better choice than a federal student loan. For example, the federal Parent PLUS loan carries a 4 percent origination fee and a 7.9 percent interest rate. Almost all of today’s private loans have zero origination fees, and qualified borrowers and co-signers can get interest rates (fixed and variable) well below the 7.9 percent interest rate of the Department’s PLUS programs. In addition, recent data also shows that the 90-day delinquency rates on federal student loans (12.31 percent) are nearly 2.5 times that of private student loans (5.33 percent).
Additionally, unlike federal student loans which do not include an ability to repay determination, private student loans include rigorous credit underwriting that responsibly assesses a borrower’s willingness and capacity to repay the loan. This most critical consumer protection best prepares borrowers for successful repayment. CBA members discourage unnecessary borrowing and use school certification of private student loans as a means of minimizing unnecessary borrowing.
Our members recognize to a large extent “the student loan market” is the Federal Direct Student Loan program which has 93 percent share of the market. This market dominance and the fact American families have the right to get accurate information from their government suggests to us great care should be taken to ensure that borrowers (students and families) are encouraged to use the loan, federal or private, that is the best choice for their particular circumstances. In some cases, that loan will be a private student loan.
CBA strongly encourages all policy makers to carefully review facts before either recommending all borrowers choose federal student loans in all circumstances or discouraging borrowers from checking the facts for themselves. The facts show that families can often find better priced private student loans that are better suited to their needs.
CBA stands ready to work with the Department, as well as the CFPB to help address the issues of struggling borrowers and we look forward to working with you on this shared goal.
President and CEO
Consumer Bankers Association