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Common Dreams

Student Loans Bear 'Uncanny Resemblance' to Subprime Crisis

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Common Dreams staff

(Photo: Creative Commons License / thisisbossi / flickr)

Techniques currently used by student loan lenders bear an "uncanny resemblance" to those used by subprime mortgage lenders leading up to the subsequent housing bubble burst and financial crisis of 2008, according to a new report by the Consumer Financial Protection Bureau.

Students are facing impossible barriers in paying off their loans due to unexpected changes in steep rates and fees and, more specifically, the impossibility of getting help from their lenders who are increasingly aloof, unhelpful, and inaccessible.

As a result, students who took out student loans leading up to the 2008 crisis are showing high levels of default, "reflecting the risky lending practices at the time," Reuters reports Tuesday.

"Graduates don't have a fair chance to pay back their debts if they are faced with surprises, runarounds, and dead-ends by student loan servicers," said CFPB Director Richard Cordray.

“Student loan borrower stories of detours and dead ends with their servicers bear an uncanny resemblance to problematic practices uncovered in the mortgage servicing business,” CFPB student loan ombudsman Rohit Chopra said in a statement.

For the report, CFPB collected accounts of student struggle from a database of complaints opened to student loan borrowers on the website ConsumerFinance.gov. The data deals specifically with private student loans as opposed to federal student loans. Private student loans face less regulation than federal student loans, which provide more repayment options, fixed interest rates and a generally more accessible customer service system.

However, both federal and private student debt is damaging the livelihoods of students throughout the country. Total student debt has passed the $1 trillion mark this year, and nearly one in five American households are now strapped with student loans.

Governmental watchdogs and private firms have increasingly warned of a student loan bubble burst as the rate of default continues to rise.

Chopra called Tuesday's report an "early warning" in a system that needs to make serious changes.

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