United States

Guidance on private student loans with graduated repayment terms


The federal financial regulatory agencies (Office of the Comptroller of the Currency, Federal Reserve Board of Governors, Federal Deposit Insurance Corporation, National Credit Union Administration and Consumer Financial Protection Bureau) and the State Liaison Committee of the Federal Financial Institutions Examination Council (collectively, Agencies) issued interagency guidance titled "Guidance on Private Student Loans with Graduated Repayment Terms at Origination," which provides principles that financial institutions that offer private student loans with graduated repayment terms should consider.  

Student loans with graduated repayment terms have lower initial monthly payments that gradually increase as the student's income is expected to increase. The Agencies understand that some borrowers may prefer these more flexible repayment terms, and acknowledge that graduated repayment terms are available under some federal student loan programs. However, they caution that the increased credit risk associated with private student loans over federal student loan programs may make this type of repayment program not appropriate for private student loans.

The Agencies outlined the following principles for financial institutions to consider, including in their policies and procedures for underwriting private student loans with graduated repayment terms:

  • The loans should have defined repayment periods that promote orderly repayment over the life of the loan and avoid negative amortization or balloon payments.
  • Graduated repayment terms should consist of monthly payments the borrower can sustain over the life of the loan and should begin early in the repayment period and limit payment shock.
  • Graduated repayment terms should be based on the borrower's (and cosigner's) ability to repay and should consider the highest amortizing payment over the term of the loan, and not be structured in a way that could mask delinquencies or defer losses.
  • The loans must comply with all applicable state and federal consumer protection regulations, including, but not limited to, Electronic Fund Transfers (Regulation E), Equal Credit Opportunity (Regulation B), Truth in Lending (Regulation Z), and all prohibitions against unfair, deceptive, or abusive acts or practices.
  • Financial institutions should provide borrowers with fully compliant disclosures that clearly indicate the timing and amount of payments to help ensure borrowers understand the loans' terms and features.
  • Procedures should include processes for contacting borrowers before the start of the repayment period and before each payment reset date that will help establish student debt as a priority for the borrower and to assist borrowers in dealing effectively with payment increases and other possible repayment challenges.

The Agencies remind financial institutions that both borrowers and lenders are best served by amortizing repayments of principal and interest over a reasonable time frame. However, private student loans that include graduated repayment terms and are prudently underwritten may align borrowers' income with loan repayment terms in a manner consistent with safe and sound lending practices.