- The Consumer Financial Protection Bureau will scrutinize operations at colleges that offer private loans directly to students, it said Thursday.
- The CFPB is updating its exam procedures to look at a category of loans often called institutional student loans. They're not normally affiliated with the U.S. Department of Education's federal student loan program but are offered by colleges themselves.
- Colleges and other postsecondary education providers extending lines of credit to families haven't received the same origination and servicing oversight as other lenders, according to the CFPB. The agency is concerned about institutional loans because of past examples of high interest rates and "strong-arm debt collection practices," it said in a news release, citing actions at two for-profit college operators that shut down in the mid-2010s, Corinthian Colleges and ITT Educational Services.
The CFPB will review actions against students that only colleges are able to take: restricting enrollment or class attendance of students who are late on their loan payments and withholding academic transcripts from students who owe debts. Those actions can delay students' graduations or make it hard for them to find jobs.
Other practices the agency will examine are accelerating payments for students who withdraw from programs, not issuing refunds when borrowers withdraw, and making preferential relationships with lenders. Institutions that steer students toward certain lenders could risk causing students to pay more on their loans, according to the CFPB.
The agency referenced kickback arrangements from the mid-2000s in which colleges were incentivized to push students toward specific loans. Congress has since banned certain practices, changed loan disclosures and enabled the CFPB to supervise private educational loan origination.
"Schools that offer students loans to attend their classes have a lot of power over their students' education and financial future," CFPB Director Rohit Chopra said in a statement. "It's time to open up the books on institutional student lending to ensure all students with private student loans are not harmed by illegal practices."
The CFPB's action could help prevent bad behavior in student lending, according to Robert Shireman, director of higher education excellence and a senior fellow at The Century Foundation, a progressive think tank.
"Institutional loans have been key components of some of the worst scams, so having a cop on that beat will help prevent predatory behavior," Shireman said in an email. Shireman was U.S. deputy undersecretary of education in the early Obama administration when Congress made major changes to student lending.
Thursday's move follows other recent steps by federal and state powers to crack down on student lending practices.
In September, the CFPB announced a consent order with income-share agreement provider Better Future Forward that required the nonprofit organization to change its ISA contracts, provide lending disclosures and stop saying ISAs are not loans.
Then last week, 39 state attorneys general reached a $1.85 billion settlement with student loan giant Navient. The bulk of that settlement is $1.7 billion in canceled debt balances for 66,000 private student loan borrowers following allegations Navient issued subprime loans to borrowers it knew wouldn't be able to repay them.
Navient denied the allegations. The attorneys general said the private loan borrowers primarily attended for-profit institutions.
Interest groups often link the issue of private college loans to for-profit colleges. A 2020 report from the Student Borrower Protection Center said for-profit colleges often use financial products to sidestep a Federal Student Aid requirement that such institutions receive no more than 90% of their revenue from the government's Title IV programs. For-profits that don't participate in Title IV programs often turn to "high-cost, high-risk credit or debt products," the report said.
A trade group representing for-profit institutions, Career Education Colleges and Universities, will work with the CFPB, its leader said in a statement.
"We look forward to working with the Bureau and the higher education community to ensure any institutional loan programs meets students' needs and provides appropriate safeguards," said Jason Altmire, president and CEO of CECU.
Public institutions also steer students toward risky forms of private debt, the Student Borrower Protection Center has argued. It said in a June report that "public institutions of higher education across the country, from flagship state universities to local community colleges, are driving students to take on possibly billions of dollars of dangerous shadow student debt," often through online program managers they hire to expand online courses.