Private loans on the rise

Loans from private companies now count for $1 of every $4 lent to students.

Commercials for private loan companies – with pitches guaranteeing up to $40,000 per school year, preliminary approval in just 15 minutes and payments delayed until after college – permeate television.

They sound too good to be true, and often are, but that’s not stopping their rise in popularity.

With the cost of education increasing and federal assistance failing to swell proportionally, private lenders have claimed a substantial share of the student-loan industry in the last 12 years.

Between the 1995-96 and 2005-06 school years, federal loans increased 86 percent, while private-sector loans increased 1,042 percent, according to the Institute of Higher Education Policy.

With that increase, loans from private companies now constitute $1 of every $4 lent to students, Deanne Loonin, a staff attorney with the National Consumer Law Center, said in a report released last week that detailed the borrowing dangers students face.

Loonin listed deceptive advertising, hidden fees and high interest rates, which are subject to change, as major concerns with some private company lending practices.

Furthermore, she said, some loans are structured to make life difficult for students trying to defer or get out of a loan.

“At the front end, they make the loans so expensive that they’re likely to fail for a lot of people,” she said. “And at the back end, they give you very few choices to do anything about it.”

These student loans have drawn comparisons to subprime mortgages making headlines for high default rates and predatory tactics. In both cases, once borrowers fall behind, it’s difficult to catch up on payments.

Sallie Mae, the largest lender of student loans in the nation, reported that it wrote off $142.6 million for borrowers missing payments on student loans in the third quarter of the 2007 fiscal year – more than doubling a $67.2 million write-down from the previous year.

A large number of those defaults were expected, because they came from nontraditional loans – which the company gave to students who normally wouldn’t be eligible for more secure loans, Sallie Mae spokeswoman Martha Holler said.

Robert Shireman, executive director for the Project on Student Debt, said a majority of private student loans are made in good faith, but many are high-interest predatory loans made to students attending schools with low graduation and job-placement rates.

“The likelihood of students being able to succeed and repay the loan is low, and some of them really should not have been made in the first place,” he said.

Most students turning to private loans are undergraduates, Loonin said, but a majority of the money being borrowed goes to graduate or professional students.

According to a National Postsecondary Student Aid Survey, 14 percent of full-time Minnesota undergraduates attending a four-year public institution borrowed an average of $5,600 in 2004, the last year for available statistics.

Loonin attributed the rise in private loans to the increasing cost of education, a generally uninformed or misinformed public, poor financial planning and a population generally trusting of lenders.

Kris Wright, director of the University’s Office of Student Finance, said the University encourages students to look at all options before turning to a private lender during the application process.

Of all students eligible for Pell grants, she said, 10 percent don’t even fill out a Free Application for Federal Student Aid, according to estimates.

She said if students have trouble with financial aid, they should talk with someone at One Stop, adding they need to borrow and spend responsibly.

Loonin and Shireman said they hoped the poor economic forecast may have an impact on the student-lending industry.

Lenders are having trouble selling their subprime student loans to investors, Shireman said, so the loans may become less common.

Loonin said she hoped to see lending practices change or legislative action soon.

“I think what’s really needed is better regulation of private loans,” she said, but added that is unlikely because Congress has been reluctant to regulate national lenders.