Schools that give private student loans using 'illegal practices' are facing a crackdown from Biden's top consumer watchdog

Consumer Finanial Protection Bureau — Consumer Financial Protection Bureau.
Bill Clark/CQ-Roll Call, Inc via Getty Images

The CFPB announced it's examining "illegal practices" made by schools giving out private student loans.
Schools can withhold transcripts and delay graduation if students are late on debt payments.
Debt owned by schools is typically not part of the $1.5 trillion federal student loan program.

If students at some colleges do not promptly pay back the money they borrowed from their school, they could be blocked from class enrollment or graduation. And their debt will continue to grow.

President Joe Biden's top consumer watchdog wants to make sure none of that is happening illegally.

Last week, the Consumer Financial Protection Bureau (CFPB) announced it would be examining operations of for-profit and nonprofit colleges that give private loans directly to students, also known as institutional student loans. These loans are typically not federal and are designed to help students and families afford college expenses, but if the debt does not get paid off by the set deadline, the college has the power to withhold the student's transcript and block enrollment in classes. The CFPB is looking into the legality of those consequences.

"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."

Specifically, the CFPB is examining is looking into five practices that can harm students:

Restricting class enrollment for students who are late on their loan payments, delaying their graduation
Withholding transcripts from students who owe the school debt, preventing them from showing their education progress to employers
Accelerating loan collection by making the loan immediately due if a student withdraws from the program
Failing to issue refunds if a student withdraws early
And having improper relationships with the lender than can cause students to pay more than they need to for a loan.

Over the past decade, a number of schools — like now-defunct Corinthian Colleges and ITT Tech — have come under fire for what the CFPB called "predatory lending," in which the for-profit schools misled students into taking on private students loans to cover tuition costs, but they imposed such high interest rates on the loans that many of the students could not afford them and defaulted.

Insider has previously reported on the burden of institutional student debt. Ithaka S+R, a nonprofit that researches education, estimated last year there could be as much as $15 billion in unpaid balances to colleges and universities, which is why a number of schools — particularly HBCUs — have been using Biden's stimulus money to wipe out that debt for their students since the pandemic began.

Student debt owned by schools is separate from the $1.5 trillion federal student debt crisis, which the CPFB is keeping an eye on, as well. Over the summer, the agency released a report detailing misleading practices from student-loan companies that hand out federal loans, pushing borrowers into deeper debt than they could afford.

There is little argument over schools' authority to cancel institutional student debt, but when it comes to the federal student debt load, there's controversy over Biden's legality to use his executive powers to take action. Still, some advocates and lawmakers believe it's time for the president to do what schools have been doing and enact broad loan forgiveness — something he promised voters he would do during his campaign.

Read the original article on Business Insider