Study: Private Student Loans Parallel Subprime Mortgage Lending

subprime college
By DANIEL WAGNER

WASHINGTON (AP) - Risky lending caused private student loan debt to balloon in the past decade, leaving many Americans struggling to pay off loans that they can't afford, a government study says.

Private lenders gave out money without considering whether borrowers would repay, then bundled and resold the loans to investors to avoid losing money when students defaulted, according to the study, which is being released Friday.

Those practices are closely associated with subprime mortgage lending, which inflated the housing bubble and helped bring about the 2008 financial crisis.

"Subprime-style lending went to college, and now students are paying the price," said Education Secretary Arne Duncan, whose department produced the report with the Consumer Financial Protection Bureau.

Duncan said the government must do more to ensure that people who received private loans enjoy the same protections as those who borrow from the federal government.

Student loans fall into two main categories: Loans directly from the government and those offered by banks and other private financial companies. The report focused on private student loans, which spiked from $5 billion in loans originated in 2001 to more than $20 billion in 2008. After the financial crisis, as lending standards tightened, the market shrank to $6 billion in 2011.

American consumers still owe more than $150 billion in private student loan debt, the study said. Including federal loans, Americans now owe more than $1 trillion in student loan debt, according to the CFPB. It has surpassed credit card debt as the biggest source of unsecured debt for U.S. consumers.

Private student loans are riskier than federal loans, the study said. They often carry variable interest rates, which can cause monthly payments to rise unexpectedly. Federal loans offer fixed interest rates.

In many cases, if a borrower is unable to repay, federal loans can be postponed or reduced. Those options are rare for private loans, the study said.

Students often did not understand the difference between federal and private loans, the study said. That caused many to take out costly student loans when they were eligible for cheaper, safer government loans.

The study highlights a unique feature of student debt: Unlike other credit card balances and most other debt, it is nearly impossible to cancel student debt by filing for bankruptcy. That leaves many borrowers trapped, behind on loans that lenders are unwilling to modify, the study said. There are more than 850,000 private loans in default, worth more than $8.1 billion, it said.

"Too many student loan borrowers are struggling to pay off private student loans that they did not understand and cannot afford," said Richard Cordray, director of the Consumer Financial Protection Bureau. The CFPB was created in the wake of the financial crisis to protect people against unfair loans, unexpected fees and other financial threats.

Lending standards for private student loans were loose during the credit bubble of the mid-2000s, the report said. Because private lenders marketed directly to students, bypassing school financial aid officers, schools did not review borrowers' financial needs or enrollment status. As a result, many borrowed far more than they needed to pay for tuition. The loans went to people with increasingly weak credit scores, making repayment less likely, the study said.

The report is based on data from nine lenders on over more than 5 million loans made between 2005 and 2011, as well as data from five nonprofit lenders. It was required under a sweeping overhaul of financial rules passed by Congress in 2010.

It said that lenders have been more careful since the financial crisis reduced the amount of credit available. For example, in 2011, more than 90 percent of private student loans required a co-signer, compared with 67 percent in 2008.

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Setanta

so NOW WE ARE RESPONSIBLE for their degrees and certification papers ?

NO.
we've had ENOUGH OF THIS $_it.

July 20 2012 at 12:40 PM Report abuse rate up rate down Reply
1 reply to Setanta's comment
chris1011

You don't read, do you. You just react knee-jerk fashion. The article above talks about PRIVATE student loans, NOT government loans. You, as taxpayer (which I doubt you really are) are not on the hook for PRIVATE loans, dipstick!!!

July 20 2012 at 4:33 PM Report abuse rate up rate down Reply
Matt

Stop subsidizing and guaranteeing the loans, Uncle Sam!!! We learned nothing from housing...

July 20 2012 at 12:33 PM Report abuse rate up rate down Reply
2 replies to Matt's comment
jmcalif

.

July 20 2012 at 12:43 PM Report abuse rate up rate down Reply
1 reply to jmcalif's comment
Setanta

??????????????

July 20 2012 at 12:47 PM Report abuse rate up rate down
jmcalif

The Government does not subsidize or guarantee "Private" Student Loans and no longer subidizes or guarantees Federal Student Loans via Private Banks/Lenders they KICKED them out of the Federal Student Loan Program and Now the Governement is the sole lender for Federal Student Loans therefore, WE the taxpayers are the ones subidizing these loans ultimately and the Gov is making all the money from the interest & payments made or losing depending on your view. The problem is a college education should not cost so much that anyone has to borrow to get one. LOWER EDUCATION COSTS!! Everyone who wants and education should be able to obtain it without huge debt.

July 20 2012 at 12:48 PM Report abuse rate up rate down Reply
1 reply to jmcalif's comment
Matt

The government guaranteed and subsidized tuition-loans long enough. Even if they don't directly subsidize certain types of loans, their involvement distorts the market and creates moral hazards. The gov't didn't guarantee subprime loans either, but the subsidization and guarantee of normal loans (along with tax breaks, etc.) made subprime loans seem like a good idea. If the government would get out of housing and education, the market would fix these things, and prices would never be allowed to get to such absurd levels. If left up to the markets, then consumers would decide the price of a college degree: that would be economic democracy. Prices never would have gotten so high if not for government involvement in the market, both directly through subsidies, guarantees,and tax breaks, but also indirectly through interest-rate manipulation.

We, the taxpayers, are the government. We keep electing people who think that debt is growth (you can deduct interest payments on your income taxes, but not principal), and that subsidizing the hell out of things (like housing and tuition) makes it cheaper. It's amazing how ignorant a country like the US can be.

July 20 2012 at 4:11 PM Report abuse rate up rate down