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By Elvina Nawaguna
WASHINGTON (Reuters) - Regulators on Tuesday called on private student loan lenders to offer more flexible repayment terms to borrowers at a time when many are struggling to pay off their debt.
Testifying before the Senate Banking Committee, federal regulators said private student loans constitute a small portion of overall student debt, but many people are struggling to repay their loans and delinquency rates for such loans are high.
"It's absolutely important that we address the large population of existing private loan borrowers. Many of those borrowers are certainly victims of the bad economy that they had no role in creating," said Rohit Chopra, student loan ombudsman at the U.S. Consumer Financial Protection Bureau.
Two Democratic senators introduced legislation on Thursday that would create a framework for private loan borrowers to refinance their student loans.
Some private lenders offering student loans include Sallie Mae, Wells Fargo and SunTrust Bank.
The bill, sponsored by Sherrod Brown of Ohio and Heidi Heitkamp of North Dakota, would ask the Treasury Department to come up with a refinancing program that would cut certain borrowers' interest rates by up to 50 percent.
Lawmakers and regulators have raised concerns about a growing student debt problem, citing a steady rise in delinquency rates and the fact that outstanding student debt has topped $1 trillion in the United States.
Of the total $1.2 trillion in outstanding U.S. student loan debt, $150 billion is in private student loans and the rest is federal student loans backed by the government, according to the Consumer Financial Protection Bureau.
About $8 billion of those private loans are delinquent.
Chopra said private student loans generally carry higher interest rates, are difficult to restructure and don't offer the kind of flexible repayment options as federal loans.
An estimated 81 percent of borrowers who graduated with more than $40,000 in student debt during the financial crisis used private loans.
Regulators said this large debt affects borrowers' ability to obtain credit and make important financial decisions.
"Student loan delinquency is also associated with higher delinquency rates on other types of debt," said Todd Vermilyea, senior associate director at the Federal Reserve's banking supervision and regulation division.
More than 15 percent of delinquent student loan borrowers, he said, also have delinquent auto loans; 35 percent have delinquent credit card debt; and more than 25 percent are delinquent on mortgage payments.
Regulators want banks to allow borrowers to refinance and restructure their loans so they can take advantage of lower interest rates just like homeowners with mortgages.
Regulators also want banks to work with borrowers facing hardships so they can find ways to pay off the debt.
In a March letter to Federal Reserve Chairman Ben Bernanke and other financial regulators, the Consumer Bankers Association said its members want to help struggling borrowers, but are limited by stringent accounting procedures, such as troubled debt restructuring rules.
The group said these accounting rules force banks to recognize losses on their books when dealing with delinquent loans.
Regulators testifying before the Senate Banking Committee, however, said that flexibility exists.
"We encourage banks to work with customers before it gets to a point where it's severely delinquent," said John Lyons, senior deputy comptroller for bank supervision policy at the Office of the Comptroller of the Currency.
That flexibility, Lyons said, includes extending grace periods for loan repayments, permanently reducing the interest rates, or modifying payments in cases where the borrower is experiencing long-term hardship.
Regulators at the hearing said private lenders would not be penalized for arranging alternate repayment plans with borrowers.
(Reporting by Elvina Nawaguna; Editing by Karey Van Hall and Stacey Joyce)