Feds May Play Future Role in Student Loans, Chopra Says

Federal agencies intervened in the student-loan market during the financial crisis and could play a future role, said the Consumer Financial Protection Bureau’s student-loan ombudsman.

“Regulators and agencies and the Fed 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,” Rohit Chopra said in an interview for Bloomberg Radio’s “Bloomberg EDU with Jane Williams” program.

“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,” Chopra said.

Outstanding student-loan debt is about $1 trillion. About 15 percent comes from private loans made by banks and other lenders, and the rest is federally backed, according to the agency.

The Federal Reserve Board of Governors exercised its authority to establish the Term Asset-Backed Securities Loan Facility, which facilitated the issuance of a wide range of such 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 in the interview. “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 Loans

Private loans feature mostly variable rates that can be more than twice what some borrowers pay in the federal program, and they don’t guarantee income-based repayment programs as with federal loans.

The CFPB issued a report about private student loans on July 20, saying students were victims of a “subprime-style” private loan market.

Also on the Bloomberg radio program, Education Secretary Arne Duncan said there’s “no simple answer” to the long-term solution of student debt.

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

The CFPB was created by the 2010 Dodd-Frank Act to protect the consumer from abuses related to financial products including student loans, mortgages and credit cards. The act required the agency and the Education Department to report on the private loan industry.

(The interview with Duncan and Chopra will air on Aug. 24 at 10 p.m. New York time, on Aug. 25 at 5 a.m., 11 a.m. and 8 p.m., and on Aug. 26 at 12 a.m. and 7 p.m. It is also available on Bloomberg.com and on iTunes.)

To contact the reporters on this story: Janet Lorin in New York at jlorin@bloomberg.net; Jane Williams in New York at jwilliams202@bloomberg.net

To contact the editor responsible for this story: Lisa Wolfson at lwolfson@bloomberg.net