The dangers of private loans

With an increase in need for financial aid, private lenders are making a big profit.

One of our most important social goals – housing – has seen rough times lately. A second may soon be facing a similar fate. A consumer advocacy group published the results of its study on private student loans this month. The findings were “ominous.”

The National Consumer Law Center studied 28 private loans issued between 2001 and 2006 and found them to be similar to subprime mortgages.

According to the study, the combination of increased costs for tuition and “stagnant loan limits” in federal loan programs has increased the need for financial aid. Private loans can seem like an easy way to get extra cash fast, but the truth is those lenders take advantage of students’ need for money, charging high interest rates and enforcing strict, unreasonable requirements. The study found that some loans even say there will be no cancellation if the borrower or co-signer dies or becomes disabled.

Students borrowing from these private sources make up about 24 percent of the total education loan volume, according to the study. “It is extremely important to promote choice in higher education, regardless of a student’s financial resources. The question is whether this goal is attained through increased private loan borrowing,” the study states. “Most important is whether the private loans are sustainable so that the debt does not bury students later down the road.”

Subprime mortgages and private education loans aren’t so dissimilar. The center’s study draws comparisons in several areas including market problems, “outsourcing of social goals,” lack of regulation, risk-based pricing, so-called “benefits for lower income consumers,” predatory terms of agreement, lack of disclosures.

Students need to be more informed of the dangers of private loans and legislators need to create new standards for providing accurate information about the loans and ensuring students don’t spend their lives paying for their education.