Private Student Loan Lenders Open Door To Modifications

Help is coming for beleaguered borrowers who took out student loans from private lenders.

How much help – and how many people actually will benefit from it – is still very much under discussion, but two private lenders at least have opened the door to assist financially distressed customers.

Wells Fargo Bank and Discover Financial Services, two of the largest operators in the private student loan industry, said they will offer loan modification programs in 2015 to anxious borrowers, but the details of the plans are sketchy.

Wells Fargo, the second-largest lenders with $11.9 billion in loans outstanding, said it will reduce interest rates to as low as one percent for a very select group of customers. Current interest rates on private student loans typically range from six to 12 percent. Borrowers with older student loans could be paying interest as high as 18 percent.

To get a rate reduction from Wells Fargo, both the person who took out the loan and the co-signer, usually a parent, must demonstrate financial hardship. The program is not available to borrowers already in default.

Not Many Getting Help

Wells Fargo has 1.3 million student loan customers. John Rasmussen, the company’s head of Education Financial Services, said the new program would help between 600 and 1,000 customers by the end of the year.

“The private student loan modification program demonstrates our commitment to helping our customers achieve financial stability and success,” Rasmussen said in a press release. “We remain focused on providing a broad range of resources and programs to assist individuals in financing their dreams of higher education.”

Wells Fargo also intends to extend repayment plans for up to five years for those customers that need even more help.

Discover said it would not release details of its loan modification plans until next year. Reports say the company that has $8.3 billion in student loans, is going to lower interest rates on distressed customers and may even come up with a loan forgiveness program for overwhelmed borrowers.

“Each situation is different and we work with each borrower individually to match them to the best repayment plan,” Danny Ray, president of Discover Student Loans, said in an email to Debt.org. “Our programs are flexible and we want to do what is best for the borrower to help them stay on track and continue making payments.”

Government Criticizes Private Lenders

The moves by Wells Fargo and Discover come after a scathing report from the Consumer Financial Protection Bureau (CFPB) in October that hammered private lenders for not giving customers in trouble, more relief options.

The CFPB report said that it received 5,300 complaints on private student loans in the past year and included this comment in the executive summary:

“Many complaints indicate that borrowers sought to negotiate a modified repayment plan during a period of financial distress, but lenders and servicers provided no options, leading the borrower to default.”

MeasureOne, a data firm that calls itself “a neutral and objective third-party provider” in the student loan industry, published a Private Student Loan Report in July that said that delinquencies and defaults in private student loans are at the lowest levels since 2008.

The MeasureOne report said that delinquent rates (90-plus days past due) are just 2.55 percent while defaults are at 3.16 percent. Delinquent rates for federal student loans are 11.5 percent, according to the Federal Reserve Board of New York and default rates are 13.7 percent, according to the Department of Education.

It should be noted that federal default rates are calculated over a three-year period, while private loan default rates are based on less than one year. Also, private loans go through an underwriting process that includes examining credit scores while federal loans are need-based with no underwriting and thus much easier to obtain.

Private student loans account for just under 10 percent of the estimated $1.4 trillion student debt. Federal loan borrowers, who hold more than $1 trillion of that debt, can avoid default by taking advantage of several loan modification programs, including Income Based Repayment, Pay As You Earn and Student Loan Forgiveness.

Private lenders do not have similar programs, which causes them to default. Critics contend that because a 2005 law made it virtually impossible for write off student loans as part of a bankruptcy proceeding, the banks have little incentive to create programs that would help borrowers in financial trouble because of a lost job, medical issues or unforeseen catastrophes.

Borrowers who default on loans cause dramatic damage to credit scores and thus their ability to borrow for things like a home or automobile.