Feds may take future action in student-loan debt market

Rohit Chopra, a student loan ombudsman with the Consumer Financial Protection Bureau, said this week that U.S. regulators and federal agencies that intervened in the student-loan market during the recent financial collapse could play a future role.

“Regulators and agencies and the Fed[eral] Reserve may have a role to play to ensure that the market is working well and is liquid and that risk really reflects a price appropriately,” Chopra said, Bloomberg reports. “Certain low-risk borrowers probably don’t need to be paying such high rates and paying those high rates is leading them to delay a lot of economic milestones, which have really large consequences and ripple effects for the entire economy, including the housing market.”

Total outstanding student loan debt stands at at approximately $1 trillion, 15 percent of which is derived from private loans, while the rest is backed by the federal government.
The Federal Reserve Board of Governors established the Term Asset-Backed Securities Loan Facility, which allowed for issuance of a number of securities, including those backed by student loans.

“During the financial crisis, we had seen the Fed try and ensure that capital markets were functioning and used certain authorities to make sure that asset-backed securities whose underlying assets were private student loans, were able to be made,” Chopra said, according to Bloomberg. “It seems that there are some places where the market is not working. You have a lot of responsible borrowers paying very high interest for several years now, but they’re unable to refinance that debt.”

Private student loans feature variable rates that can be more than double what borrowers pay on a federal loan. These loans also don’t guarantee income-based repayment programs like those associated with federal loans.

Arne Duncan, the U.S. secretary of education, said that there is no simple solution to student debt.

“We can’t begin to do this all at the federal level,” Duncan said, Bloomberg reports. “We need states to continue to invest, and we saw 40 states cut funding to higher education this past year. You need universities to keep costs down, keep tuition down in tough economic times.”

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