The private student loan market may be doing better than previously reported, according to a new study from student loan analyst MeasureOne.
By analyzing data from seven of the largest private student lenders, the nonprofit data company found the outstanding balance of private loans has essentially leveled off since 2011, while that of federal loans has consistently increased since 2008. Outstanding balances from those seven lenders make up about 6 percent of all outstanding student loan debt. Overall, private student loans account for about $90 billion, or 8 percent of the $1.1 trillion in outstanding student debt, the report says.
“The rapid growth of the student loan market has been the focus of a great deal of media, political and regulatory action,” Feshbach, MeasureOne founder and chief executive officer, in a statement reported by U.S. News and World Report. The findings, he said, show “the improving credit quality and repayment performance of the private student loans of the seven largest active lenders.”
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The number of undergraduate students taking out private loans has decreased from its peak of 14 percent in the 2007-08 school year, to 6 percent in the 2011-12 school year, the report found. Meanwhile, the share of undergraduates taking out federal loans increased from 35 percent in 2007-08 to 40 percent in 2011-12.
Seven private lenders — Discover Bank, The First Marblehead Corporation, PNC Bank, RBS Citizens, Sallie Mae, SunTrust Banks, Inc., and Wells Fargo Bank — provided data to MeasureOne for the report.
The private student loan market, which boomed in the years leading up to the financial crisis, typically doesn’t offer the same consumer protections as the federal student loan market, and has drawn harsh criticism from student advocacy groups and government agencies.
The Consumer Financial Protection Bureau has zeroed in on consumer complaints that detail borrowers’ expressed inability to repay their private loans. Unlike federal loans, private loans typically don’t have income-based repayment plans, and are more difficult, if not impossible to refinance.
Thousands of borrowers have submitted complaints — according to the CFPB’s second annual report on private student loan processing related to problems with payment processing, especially when borrowers needed to adjust their repayment terms during financial hardship. Many frustrated borrowers have also complained about breakdowns in communication with their private lenders and servicers, especially if their loans are transferred between servicers.
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“Basic account information is sometimes unavailable, records are not retained, and borrowers are ping-ponged from one customer service representative to the next and to the next, without getting an accurate or even consistent answer,” said Rohit Chopra, the CFPB’s student loan ombudsman, upon the release of the October report.
But of all loans, both federal and private, that are in repayment and seriously delinquent (more than 90 days past due), the share of private loans has dropped from a high of about 6 percent in the second quarter of 2009, to about 3 percent as of the third quarter of 2013, MeasureOne reported. The Federal Reserve Bank of New York estimates the number of student loans, both federal and private, that are in serious delinquencies increased to 21 percent as of the third quarter of 2012.
The report suggests the decline in delinquencies and the number of overall private student loans is due to the fact students and schools are being more careful.
In the years leading up to the recession (2005 to 2007) the percentage of private student loans certified by a student’s college or university was much lower than it is today.
School certification is important, according to the CFPB, because the school’s financial aid office verifies a student’s financial need and receives loan payments directly from the lender. This helps prevent over-borrowing, and gives financial aid officials the opportunity to counsel families and students on their borrowing options.
Between 2005 and 2007, according to the CFPB, the percentage of private loans that were made without school involvement or certification grew from 18 percent to 31 percent.
But according to the MeasureOne report, which only looked at seven private lenders, the percentage of private loans that were uncertified dropped to 0.76 percent in the 2012-13 school year.
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Additionally, more students today are taking out private loans with co-signers. In the 2008-09 school year, for example, about three-quarters of undergraduates took out private loans with a co-signer. But by the 2012-13 school year, more than 91 percent did so. Overall, nearly 87 percent of undergraduates and graduates took out loans with co-signers in 2012-13.
Richard Hunt, president and chief executive officer of the Consumer Bankers Association, said in a statement that those in the federal student loan market should learn from “the long-standing best practices the private student loan market has used to best serve our nation’s students.”
Hunt also noted the consistently increasing rate of default — failing to make student loan payments for 270 days — among federal student loans. The Department of Education released data in October showing the number of borrowers who defaulted on their student loans two and three years after entering repayment has increased for several years.
“Thanks to commonsense underwriting by lenders, there have been positive trends in private loan performance over the past 5 years…In contrast, federal student loan default rates continue to rise at an unconscionable rate,” said Richard Hunt, president and chief executive officer of the Consumer Bankers Association, in a statement. “With over $1 trillion in outstanding federal student loan debt, students — and the taxpayers who foot the bill — are done a great disservice when defaults occur.”