The increasing volume of student-loan debt may have a significant effect on the nation's economy, hindering borrowers' ability to qualify for home and automobile loans, save for retirement, and pursue entrepreneurial ventures, according to a report from the federal government's consumer-watchdog agency.
The report, released on Wednesday by the Consumer Financial Protection Bureau, analyzes more than 28,000 comments solicited from the public on how to create affordable repayment options for borrowers with private student loans. With collective student-loan debt now totaling more than $1-trillion and far outpacing wage growth for college graduates, borrowers are less likely to take financial risks that would normally help fuel economic growth, the report says.
The report focuses on the plight of borrowers who have loans from banks and other private lenders, which have a simpler application process than federal student loans but carry fewer consumer protections. Borrowers with private student loans make up the vast majority of high-debt borrowers; in 2008 more than 80 percent of college graduates with at least $40,000 in student debt had private loans, the report says.
"While federal loans remain a student's best option, the CFPB's important work highlights that many students are struggling to repay debt from private lenders," Secretary of Education Arne Duncan said in a written statement.
In February the bureau began soliciting comments on how to create more flexibility for borrowers with private student loans after many frustrated borrowers said they were struggling to make ends meet with high monthly loan payments and few options to refinance or negotiate other repayment options.
"Student debt has become the defining feature of their lives—the millstone around their necks that holds them back from a full financial future," Richard Cordray, the bureau's director, said in a written statement.
Many of those who responded to the bureau's request for comments expressed concern about the potential "domino effect" that can result when monthly student-loan payments deplete consumers' savings, prevent other types of consumer spending, and influence how graduates make choices about their careers and living situations.
In the past, individuals with student loans typically had higher rates of home ownership because the loans were a sign of higher levels of education, and therefore higher incomes. However, wages for college graduates have not increased at the same pace as student-loan debt, and borrowers today have been more hesitant to make such investments, the report says.
The National Association of Home Builders said in its response to the bureau that carrying a large amount of debt can exclude potential homebuyers from access to credit by lowering the amount of mortgage debt for which they qualify. Those decisions can in turn affect the housing market by decreasing demand and preventing existing homeowners from "moving up" and purchasing their next home, the report says.
High monthly loan payments and lower wages also mean that borrowers may be less able to save for retirement, or may have to rely on aging parents to help pay their debt.
Equal Justice Works, a nonprofit organization for law students and lawyers, said in its response to the bureau that many borrowers the organization works with are employed but unable to plan for the future because of the size of their debt. Some borrowers have delayed marriage until they can pay off their debt, the organization's statement said. Others have had adverse effects on their credit, and some even struggle to afford basic necessities because their monthly payments are so high.
"We've heard borrowers anguish over whether to pay their private loans or groceries and rent," the Equal Justice Works response said. "For these borrowers, private student loans have become a source of anxiety and deprivation, rather than an aid to accessing a higher education, financial stability, and a successful career."
Though financial-aid administrators typically encourage students who borrow to pay for college to take out federal student loans first, many borrowers still turn to private loans. Some private student loans offer lower interest rates, and are easier to get than federal loans. Some borrowers take out private loans because they have hit the lifetime borrowing limits that most federal loans have, but are still unable to pay for college.
In its report, the bureau mentions a number of policy solutions suggested by the public, including creating more options for borrowers to refinance their private student loans, more negotiable repayment plans, and a "credit clean slate," in which borrowers can repair their credit scores by adhering to a negotiated payment plan.
Rohit Chopra, the bureau's loan ombudsman, said in a conference call with reporters that most borrowers asserted they were not looking to get off the hook for their debt, but rather wanted "a payment plan that works." Policy makers should look not only for a sustainable long-term solution, but also for options that can help borrowers who are struggling now, Mr. Chopra said.
"As we consider the tremendous challenge posed by rising levels of student debt, it is very tempting for policy makers to focus solely on future generations of student-loan borrowers, so it can be avoided for the next group," Mr. Chopra said. "But for borrowers struggling today, that singular focus feels like rearranging deck chairs on the Titanic."