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Will new student loan options make a dent in debt?

November 30, 2014 at 2:53 PM EDT
Millions of Americans live with student debt for years, even decades after they graduate from college. Now, two of the nation's largest private student lenders have introduced options to allow borrowers to modify the terms on their loans. NewsHour's Hari Sreenivasan speaks with Marian Wang, a reporter with ProPublica and AnnaMaria Andriotis of the Wall Street Journal.
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HARI SREENIVASAN, PBS ANCHOR: Student debt is something millions of Americans live with for years — even decades after they graduate college. Now, two of the nation’s largest private student lenders are rolling out options that will allow borrowers to modify the terms on their loans.

For more about the significance of this, we’re joined now by Marian Wang, a reporter with ProPublica and by AnnaMaria Andriotis. She is with the Wall Street Journal.

So AnnaMaria, let me start with you. Explain the change. What kinds of modifications are we talking about? Who does this apply to?

ANNAMARIA ANDRIOTIS, THE WALL STREET JOURNAL: So we’re talking about declines in the interest rates that student loan borrowers are paying. And this announcement came out of Wells Fargo this past week. Wells Fargo is the second largest private student lender, and what they have decided to start doing is to lower the monthly payment by essentially lowering the interest rate to as low as one percent for borrowers.

That’s significant because actually many borrowers have private student loans with interest rates that are 10 percent or higher than that. So what they’re starting to see is significant declines in what they’re paying monthly.

HARI SREENIVASAN: And banks didn’t want to do this. Why did they go forward with this?

ANNAMARIA ANDRIOTIS: This is a significant turnaround, and there’s a lot of discussion as to what has led to it. What we know is that over the past couple of years the Consumer Financial Protection Bureau has been applying a lot of pressure on private lenders, basically telling them that they need to start offering repayment options similar to what the federal government offers on its loans. The federal government offers a lot of flexibility for borrowers, in particular those who don’t have high salaries.

So there’s been a lot of back and forth between the CFPB and private lenders. In addition, from the private lender side, what we have started hearing is that there have been a lot of internal discussions at banks about how do we increase loan revenue going forward? If we alienate student borrowers — people who are right now in their 20s and early 30s — down the road when it comes time for them to get a mortgage or when they’re looking to establish some type of banking relationship, we might not get those borrowers. They might go somewhere else.

HARI SREENIVASAN: Right, right, right. So Marian, put this population in perspective for us. Because as she mentioned, the federal loans have already been doing some of this in the past. And how much can an average kind of borrower save if they qualify for this modification, do you think?

MARIAN WANG, PROPUBLICA: Well, just to give a little more context, the pool of private student loan borrowers is vastly outnumbered by the pool of federal student loan borrowers. And the feds originate a vast majority of student loan debt. And you’re absolutely right that the feds have for a long time offered income-based repayment plans, things that will help you sort of scale your monthly payments to something that’s reasonable for you if you qualify for those programs.

HARI SREENIVASAN: Right. So is there an idea, is there kind of a benchmark that they know about what income level this is going to hit someone at, and if they go from 10 percent to one percent, that’s obviously a significant saving, but it also, I guess, depends on how much they have in debt, right?

ANNAMARIA ANDRIOTIS: Sure, so what Wells Fargo, at least, has said is it’s going to look at their overall debt by looking at the borrowers credit reports and they’re looking at their income, and they’re hoping to come to something like a monthly payment that equals about 10 to 15 percent of their income.

Now, what’s also interesting is that Discover, which is the third largest private student lender in the country, is also planning on rolling out loan modifications early next year. What we’ve heard from them is there are potentially even more significant breaks that are being considered. For instance, loan forgiveness, which is something totally unheard of that a private lender would have never even considered up until recently.

And it’s important to point out that private student borrowers, though dealing with a lot of difficulties, as Marian pointed out, are a small share of the overall borrowers out there. So private student loan debt accounts for about eight percent of outstanding student loans. We’ve seen a lot of back and forth between lenders and the CFPB. Lenders are saying, why are you picking on us when the federal government accounts for the majority of that out there.

HARI SREENIVASAN: Alright, so Marian, what about the role that parents play in this? A lot of parents take out private personal loans on top of whatever the financial aid package is that the university can give, right?

MARIAN WANG: Well, yeah, and there’s actually a federal program that’s specifically geared at parents that I did a report on a couple years ago. It’s interesting because federal student loans to students in particular are capped at a certain level. You can only borrow so much in a year. And so, there’s not a lot of underwriting and that’s why there’s a cap.

This federal program for borrowing specifically geared toward parents, actually it’s called the Parent Plus program, and that’s an interesting program because those programs aren’t capped. You can take as much out as you need. There’s very limited underwriting for those loans. And that program is interesting because you see a lot of the financial strain that families face through that program because it’s not capped.

And so you can see more parents taking out more loans, taking out larger loans through this program over time. You’ve really seen it especially in the last five years.

HARI SREENIVASAN: So are those loans through the Parent Plus Program at greater risk for default if, say for example, a parent may not have a steady income coming in but they still qualify to take out a huge loan to get their kids through school.

MARIAN WANG: Absolutely. That’s something we looked at. There’s very limited underwriting where they don’t look at your debt-to-income ratio, like a private lender would. And they can take out vast amounts of money, as much as they need, essentially, to help their kid out, and a lot of parents do. That’s absolutely a thing that parents can get overextended in doing so.

HARI SREENIVASAN: And what about the roles that colleges and universities play in this too? I mean, there doesn’t seem to be that much transparency in figuring out exactly what  the financial aid package is and why once student got this much and another student got this much, when perhaps their parents made the same, right?

ANNAMARIA ANDRIOTIS: Well, what’s playing out, the reason why we’re seeing more borrowers, more students come out of school with more debt is because college tuition costs keep rising, right? And what become very confusing for families is when financial aid packages go out to students. And most schools, what they do is they include student loans as part of the financial aid package — federal student loans, that is — but one would argue is to how much of aid is a student loan when a student loan is something you have to pay back. It’s not like grants or scholarships, for example.

So colleges for sure do play a large role here. And there’s been this ongoing debate about why should, for instance, the federal government keep giving out more and more aid? It’s essentially incentivizing the colleges to continue increasing their tuition because they’re saying, well, the money’s got to come from somewhere, someone’s going to pay for it.

HARI SREENIVASAN: Right.

MARIAN WANG: And to your question, too, I think absolutely, schools need to be brought into this. Schools have their own pot of financial aid, essentially. And there’s a sticker price, but they discount it heavily depending on what kind of student you are. And so they have your financial information and they are essentially moneyballing financial aid these days.

HARI SREENIVASAN: Explain that.

MARIAN WANG: There’s a whole industry called enrollment management. There didn’t used to be enrollment managers at schools, you know, two decades ago. But that’s a position that’s sort of been created, essentially to use data, to really create detailed student profiles and do what they call — this is all jargon — but it’s “financial aid leveraging.” How does the school get the biggest bang for its financial aid dollar?

And sometimes that means they’re essentially picking students that they are OK having overborrow, versus students whom they really want and will generally try to protect from having to borrow. And so they’re trying to incentivize certain students coming and certain students they care less about and they’re more comfortable, honestly packaging a student loan in that financial aid package. And that’s a decision that schools are making, picking which students essentially get more, and which students will have to borrow more.

And I think that should definitely be put on schools. The other thing I think is really important to bring up is that it’s on schools to make sure that kids are graduating on time with a meaningful degree. And the surest way to get in over your head with student debt is to drop out and have debt for college and nothing to show for it. You don’t have that credential. You don’t have that higher earning power.

That’s a huge source of debt, and that’s really a terrible situation for a student to be in. The other thing is graduating on time. It’s a sure way to get more debt if you stay six years versus your peer who’s able to get out in four.

HARI SREENIVASAN: Alright, Marian Wang from ProPublica and AnnaMaria Andriotis from the Wall Street Journal, thanks so much for joining us.

ANNAMARIA ANDRIOTIS: Thank you.

MARIAN WANG: Thanks for having us.

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