At nearly $1.2 trillion, the amount of outstanding student debt eclipses all other forms of household debt except home mortgages. Yet while interest rates on home loans and other common forms of debt have fallen over the past few years, enabling millions of borrowers to refinance into cheaper rates, student debt is nearly impossible to refinance, federal regulators have said.
Rohit Chopra, Consumer Financial Protection Bureau student loan ombudsman, said in response to questions at a panel discussion Wednesday that Fed policies to engineer lower interest rates across the economy have not helped borrowers with student debt.
A Fed representative declined to comment.
The acknowledgement may fuel efforts in Congress and within the Obama administration to target households struggling with student debt burdens with ways to refinance their loans as Washington policymakers begin to realize there are limits to the Fed’s efforts, officials said. The Fed has almost single-handedly propped up the U.S. economy by reducing borrowing costs as fiscal authorities have reduced spending and raised taxes.
Chopra's comments may also force the Fed to increase pressure on other policymakers, given the Fed’s history of agitating for action when its monetary policy appears to be ineffective. In 2011 and early 2012, Fed officials in Washington and top policymakers from the Federal Reserve Bank of New York suggested specific actions that Congress and other regulators should take in order to ease conditions in the housing market to allow more households to take advantage of near-record low interest rates and refinance their home loans.
In a January 2012 report to Congress, the Fed said: “Barriers to refinancing blunt the transmission of monetary policy to the household sector. Further attention to easing some of these obstacles could contribute to the gradual recovery in housing markets and thus help speed the overall economic recovery.”
Many of the Fed's suggestions were adopted.
Chopra linked student debt to difficulties in the property market, referring to the Fed’s report to Congress in which the central bank also noted a significant drop in home purchase activity by first-time homebuyers. A sustainable recovery in the housing market depends in part on the return of first-time buyers, who typically are fresh college graduates aged 25 to 34 buying smaller “starter” homes that homeowners sell when moving up to bigger properties.
In April, New York Fed researchers said that student debt may be hindering household spending and “may have broad implications for the ongoing recovery of the housing and vehicle markets” after finding that younger workers with student debt for the first time in at least a decade are less likely than their unburdened peers to have home mortgages or auto loans.
“I actually think student debt is much more of an obstacle to broader monetary policy goals than we think, because of that link to housing,” Chopra said.
Some senior policymakers at the Fed and other regulators previously have identified high levels of student debt as a risk to economic growth because it may limit consumption. The Fed's Board of Governors has been briefed by top student debt experts outside the government on the potential perils of skyrocketing student debt, according to people familiar with the matter.
President Barack Obama has said student debt “holds back our entire middle class” in part because debt repayment forces younger households to delay house and auto purchases -- “the things that grow our economy and create new jobs.”
Chopra said of the Fed: “If they’re trying to help young households spend more and participate in the economy, student debt -- the inability to refinance and also the obstacle that student debt[ors] might face in trying to enter the housing market -- could be a serious problem.”
The CFPB has suggested various ways to help present borrowers. This week, Sen. Sherrod Brown (D-Ohio) introduced a proposal with three fellow Democrats that could enable millions of borrowers to refinance the cumulative $150 billion in private student debt carried by U.S. households.
Two of Brown’s cosponsors, Sen. Dick Durbin (D-Ill.) and Sen. Patty Murray (D-Wash.) are among the top four in Senate Democratic leadership, suggesting his bill stands a decent chance of passing the Democratically controlled Senate.
The bill already is gaining attention among some policymakers. Part of its appeal, officials said, is its provision forbidding taxpayers to foot the bill for any refinance or loan modification initiative.
During a Tuesday hearing before the Senate Banking Committee, Chopra said Brown’s proposal was “worthy of very careful consideration.” Doreen Eberley, Federal Deposit Insurance Corp. director of risk management supervision, said it was “very interesting” and added: “It's something we'd be interested in working with you on.” Todd Vermilyea, senior associate director at the Fed’s supervision and regulation division, said the central bank was “interested in exploring this further.”
John Lyons, senior deputy comptroller of bank supervision policy and chief national bank examiner at the Office of the Comptroller of the Currency, noted that the lack of refinancings of student debt may reflect “market inefficiencies,” such as the lack of competition.
“I would not be surprised if the Fed started to look very seriously about how inefficiencies in the student debt market might be challenging them on the goals they’re trying to accomplish,” Chopra said Wednesday.