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Watchdogging Private Student Loan Companies

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The Consumer Financial Protection Bureau's public complaints database levels the playing field for private student loan borrowers -- giving aggrieved private student borrowers true negotiating strength in a financial marketplace that is tilted toward banks.

Student and consumer advocates knew this in theory when we supported the creation of the CFPB as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. A new report by the U.S. PIRG Education Fund, "Private Loans, Public Complaints: The CFPB's Consumer Complaint's Database Gets Real Results for Student Borrowers," confirms it for a fact.

Private student loan (PSL) borrowers desperately need the help.

Prior to the financial collapse and recession of 2008, the private student loan market was largely unregulated -- meaning that private student loans were risky and expensive, reaping windfall profits for the banks instead of providing affordable access to higher education for students taking on these loans. Paying for college with private student loans is like putting a college degree on a credit card.

Worse, millions of students fell prey to banks' deceptive marketing practices, signing on for private loans unaware of the drastic consequences.

In a major scandal uncovered by the New York Attorney General's office in 2007, banks offered inducements and kickbacks to college financial aid offices, which in turn pushed their PSL products to their students. Fly-by-night private student lenders engaged in "direct-to-consumer" marketing through television ads, mailings, and the Internet, offering easy credit with just the click of a button. And some top lenders -- when giving student loan advice to families -- pushed their private loan products first over the availability of federal loans.

These practices resulted in borrowers taking on private student loans when they didn't have to. In fact, more than half of PSL borrowers took out these loans without first maximizing their federal student loans, which have far more generous terms and fixed interest rates.

Unfortunately, hopeful college students today still face the same basic market dynamic that existed before 2008, with college costs outpacing the availability of low-cost government aid. And with the PSL market expanding to fill that gap once again - experts predict that private student loan volume will outpace federal student loan volume by 2030 - borrowers need the bureau on their side more than ever.

Of PSL banks, growing the most is Sallie Mae. Not surprisingly, it is also the most complained about PSL lender in every single state. It is by far the single biggest PSL bank with the single biggest impact on over-burdened private student loan borrowers.

Perhaps more surprising is that the non-profit Pennsylvania Higher Education Assistance Authority (AES/PHEAA), which has purchased several private student loan portfolios and acts as the servicer for other private student lenders, ranked second in the nation for borrower complaints. This agency -- set up to keep college affordable by Pennsylvania authorities -- seems to be doing the opposite.

Most significantly, the report found that more than 20 percent of student borrowers who filed complaints got real relief after CFPB investigation.

The CFPB has helped enable more than 330 consumers, or just under 8 percent of the total complaints, to receive monetary compensation to resolve their student loan complaints, with a median amount of monetary relief of $700 and maximum relief of over $75,000.

More than 500 additional consumers, or 12 percent, have had their complaints closed with some form of non-monetary relief, such as modifying collections proceedings and providing assistance with documentation.

But if PSL borrowers are to truly get a fair shake in the marketplace, we need to do more.

The CFPB should provide greater detail in the database, such as narratives, dispute and resolution specifics, and expanded categories -- which would allow stronger public engagement and more accurate analysis of trends.

Beyond improving the database, the CFPB should consider a number of new policies to stand up for private student loan borrowers. A top priority should be to require private student loan certification, so that lenders are required to certify borrower requests for private student loans through the college financial aid office. This process would enable financial aid officers to ensure students have maxed out their federal loan options BEFORE taking out private loans.

With over $165 billion dollars in current outstanding PSL debt, we can't afford to leave private student loan borrowers unprotected. The CFPB has taken strong steps forward to stand up for student consumers, but they need to do more to ensure all students get a fair shake in the market.

You can see the CFPB's database here: http://www.consumerfinance.gov/complaintdatabase/.