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Student Lenders Could Face Greater Scrutiny in 2012: How This Could Affect You

Feb 29, 2012 Jennifer Williamson, Distance Education.org Columnist | 0 Comments

According to an article by the New York Times*, the Consumer Financial Protection Bureau is intensifying its examination of certain private student lenders, particularly in the for-profit education industry. The increased scrutiny comes after the appointment of Richard Cordray, the bureau’s new director.  This could be good news for students—but in some ways, if greater scrutiny leads to tighter restrictions, it could lead to some hassles, too. Here are a few ways in which tighter examination of student lenders could affect students.

It could reduce default rates

The lenders that will attract the bureau’s attention are generally nontraditional lenders that serve primarily students in for-profit schools whose graduates have high rates of default. According to the article, the schools sometimes project their students’ default rates to be as high as 50% after graduation—and yet these loans are still being made. That clearly indicates something is amiss. Under new scrutiny, lenders may pull back their activity in these markets.

Man with Magnifying Glass

According to an article by the New York Times*, the Consumer Financial Protection Bureau is intensifying its examination of certain private student lenders, particularly in the for-profit education industry.

It could make student loans harder to come by

One drawback of stricter legislation—which stricter scrutiny could lead to—is that it could make loans harder to take out for some students. The problem is that unscrupulous lenders make loans even to students who are unlikely, based on a variety of factors including the size of the student loan and the projected earning potential of the student, to be able to pay those loans back. This could mean that some students—the ones closest to the financial margin—could have a harder time getting private loans to help cover tuition, particularly if they’re enrolled in for-profit schools.

It could change the way student loans are marketed

One of the bureau’s concerns is the way they’re being marketed. It’s possible some of these lenders offer misleading marketing to students to persuade them to sign up. Under the law, lenders are not allowed to attract customers with free gifts; represent themselves as coming from the government (either explicitly or implicitly, with logos that look like they come from the Department of Education, for example) when they’re private; offer misleading information about loan terms; promoting low-cost deals and terms available only to a small fraction of borrowers; or mail students false checks and rebate offers.

It could reduce default rates

Of course, if fewer students on the financial margin can qualify for exorbitant private loans, fewer students will default on those loans—as the students most likely to default won’t qualify for the loans anyway. Over the long run, this could be a boon to these students, who could choose to go to community colleges where tuition is cheaper rather than expensive for-profit schools. The students would then graduate, hopefully, with a more manageable level of debt.

In general, greater restrictions on private lending is a good thing, and its possible intensified scrutiny could lead to this. Students who attend for-profit schools are less likely to be savvy about complicated financial products such as student loans, and are frequently the first in their families to attend college. These students are particularly vulnerable to predatory lending practices, and it’s not surprising that unscrupulous lenders would step in to take advantage. While tougher regulations could make it harder for students to get loans in the short run, in the long run, they could prevent thousands or millions of students from taking out loans that could later ruin their lives.

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