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Student Loans Are Holding Back Economic Recovery, CFPB Says

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Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB). Rohit Chopra, the official overseeing loans at the CFPB, says that the student loan market is holding back the economic recovery.
Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB). Rohit Chopra, the official overseeing loans at the CFPB, says that the student loan market is holding back the economic recovery.

A top regulator is once again sounding the alarm on student debt, warning that the ballooning market is putting the economic recovery on hold.

"Policymakers cannot sit by as passive observers," Rohit Chopra, student loan ombudsman for the Consumer Financial Protection Bureau, recently told the Financial Times. His remarks came a few days after the CFPB released a report likening risky student loan practices to subprime mortgage lending, which contributed to the housing bust.

"Borrowers may be paying higher rates than what their risk profile justifies," Chopra said.

Chopra told the FT that overly high interest rates may be preventing student loan borrowers from buying first homes. Many economists say that it is necessary for would-be first-time homebuyers to start buying in order for the housing market and broader economy to recover. "Student debt may be more intertwined with the housing market than we realize," Chopra told the FT.

This isn't the first time that Chopra and the CFPB have sounded the alarm about rapid growth in student loan debt. Chopra said in a speech in Austin in March that the student loan market "is too big to fail."

Americans owe more than $150 billion in private student loans, which have significantly higher interest rates than federal student loans, according to the CFPB study released last week. While federal student loans have fixed interest rates, private lenders often charge variable interest rates that are much higher than those set by the government.

Overall student debt spiked 148 percent to $902 billion between early 2005 and early 2012, according to the Federal Reserve Bank of New York. The average student loan borrower under age 30 owes a record $20,835 in student loan debt, according to the New York Fed.

"Student loan borrowers are sending big payments every month to their loan servicers, rather than becoming first-time homebuyers," Chopra said in March. "Too much debt means too much risk for a generation of young people, many of whom are struggling in today's economy."

Unlike other forms of debt that people can discharge by filing for bankruptcy, student loan debt rarely, if ever, goes away. The CFPB and the Obama administration is urging Congress to make private student loans dischargeable when someone files for bankruptcy protection.

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