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US seeks more payment flexibility for private student loans

CFPB chief Richard Cordray said private student loan borrowers are struggling to make ends meet.

T.J. Kirkpatrick/Getty Images/File 2013

CFPB chief Richard Cordray said private student loan borrowers are struggling to make ends meet.

WASHINGTON — The Consumer Financial Protection Bureau this week issued a series of proposals to create more flexible repayment plans for the millions of Americans struggling with private student loans.

Such loans, which are offered by banks and other financial firms, account for $150 billion of the $1 trillion in outstanding student loan debt, but they have come under increased scrutiny. They generally carry higher interest rates and fewer protections than federal loans.

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To ease the burden on borrowers, the consumer bureau said that those who pay on time should be able to refinance their debt at lower interest rates. Borrowers who fall behind should have access to income-based repayment plans, it said. The CFPB urged lenders to implement those recommendations. In addition, it said policy makers should help those with private loans by replicating for them the rehabilitation program available to those with federal student loans, which helps people exit default and repair their credit.

‘‘Many private student loan borrowers have run out of options and are struggling to make ends meet,’’ CFPB director Richard Cordray said Wednesday at a hearing in Miami.

The CFPB’s proposals are based on input from nearly 30,000 borrowers, policy specialists, and lenders. It follows a report the agency issued to Congress last year noting that lax underwriting standards crept into the private student loan market in the run-up to the financial crisis. Just 60 percent of private loans originated in 2006 and 2007 had co-signers, compared with 90 percent in recent years. The effects of those loans weren’t felt until students left school and were confronted with unmanageable debt in a tough employment market, according to the CFPB report.

The lenders that dominate this market, including Citigroup, JPMorgan Chase, Wells Fargo, and Discover Financial Services, are less likely to restructure loans by lowering or delaying the payments, according to the bureau.

Part of the problem, industry groups say, is that accounting rules would require banks to set aside more capital before making those types of concessions.

‘‘It’s important to recognize that these student loans are very unique assets and the characteristics are very different than other types of loans,’’ said Pace Bradshaw, vice president of congressional affairs at the Consumer Bankers Association, whose members include private student lenders.

The association recently sent a letter to the three banking regulators asking them to give lenders more leeway to offer forbearance to recent graduates. Bradshaw pointed out that despite the hardships borrowers face, private student loans have a 5 percent default rate, compared with a 13 percent default rate for federal loans.

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