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Banks Encouraged to Work with Student Loan Borrowers

bank vaultFederal banking regulators are encouraging lenders to work with borrowers who are having trouble repaying their private student loans. Prudent loan workouts are in line with safe and sound lending practices and "are generally in the long-term interest of both the financial institutions and the borrower," the agencies said in a joint statement on July 25.

Borrowers who are unemployed or underemployed may struggle to make payments on their student loans. Total student loans outstanding in the United States have nearly doubled since 2007 to more than $1 billion. Of that total, about 5 percent—or $150 billion—are private student loans. The delinquency rate for such loans is about 5 percent, compared with 11.7 percent for total student loans outstanding.

According to the agencies, banks won't be penalized for making prudent loan modifications, which under current regulations include such measures as loan deferrals, extensions, renewals, and rewrites. "As supervisors, our goal is to make sure lenders work with borrowers having temporary difficulties in a way that does not contradict sound principles of risk management," said Todd Vermilyea, senior associate director of the Federal Reserve Board's division of banking supervision and regulation. Vermilyea testified about student loans in June before the Senate Committee on Banking, Housing, and Urban Affairs.

The agencies also said that banks offering loan workouts should clearly explain the terms and requirements to borrowers and provide clear, easily accessible information on how to contact the lender or loan servicers.

July 30, 2013


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