Student Debt Shifts to Costly Private Loans

CU360
November 20, 2009 | COMMENTS

In 2007 to 2008, nearly two-thirds of undergraduate students who borrowed private student loans did not take out all they could in safer, more affordable federal loans, according to an analysis from the Project on Student Debt. In addition, the proportion of all undergraduates who took out private loans increased dramatically—from 5% in the 2003-2004 school year to 14% in the 2007-2008 school year.

"Private student loans are one of the riskiest ways to pay for college," said Lauren Asher, president of the Institute for College Access & Success, home of the Project on Student Debt.

Like credit cards, private loans often have variable interest rates that are higher for those least able afford them—as high as 18% in 2008. But unlike credit card debt, private loans are nearly impossible to discharge in bankruptcy. They also lack important consumer protections that come with federal student loans. Private loan borrowing has slowed since the credit crunch, but these risky loans remain available from major lenders.

Credit unions, however, provide a growing share of private loans at reasonable rates. Over 80 credit unions participating in the Credit Union Student Choice CUSO have made about 3,000 loans since May 2008 with a 5.8% average rate. None of the credit unions charged origination fees, while other lenders typically charge between 0% and 6% in origination fees.

"It's very clear that in general, while other lenders are retrenching and scaling back, credit unions are lending more," Credit Union National Association senior economist Mike Schenk tells News Now. It's one more opportunity in a bad economy for credit unions to meet members' needs—and to help attract younger borrowers.

Other findings:

• The share of private loan borrowers who could have borrowed more in federal Stafford loans increased dramatically, from 48% in the 2003-2004 school year to 64% in 2007-2008.

• Private loan borrowing is not limited to students at high-priced schools. Sixty-three percent of private loan borrowers attend colleges with tuition and fees of less than $10,000.

• Among all racial and ethnic groups, African American undergraduates are now the most likely to take out private student loans. That percentage quadrupled from 4% in 2003-2004 to 17% in 2007-2008.

"Without stronger consumer protections, students will continue to be vulnerable to aggressive private loan marketing tactics and inadequate information about their borrowing options," says Asher. While the Federal Reserve Board recently finalized regulations for new consumer disclosures for private student loans, the Project's analysis of the new rules suggests the Board did not go far enough to make consumers aware of other options.