Private student loans offer little protection when the going gets tough

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WASHINGTON, DC – As our higher education system is in turmoil, there is concern that more students will take on private loans and struggle to repay them.

Private student loan debt is growing at a faster rate than federal student loan debt, according to an April report from the Student Borrower Protection Center. Since 2012, the volume of new private student loan arrangements has increased every year, but the volume of new federal student loan arrangements has declined during this period.

“This is in large part linked to the high cost of higher education in America,” said Seth Frotman, executive director of the Center. “We’re just forcing more and more people to take not only more credit and debt, but riskier credit and debt to try to keep pace.”

At the end of 2019, there were $ 128 billion in private student loans, which was more than the total debt for overdue payday loans and medical debts. The total federal and private student debt is about $ 1.6 trillion.

And while the coronavirus pandemic has reduced a student’s income and made paying off private loans nearly impossible, there is no federal help. In contrast, for student loans held by the federal government, borrowers do not have to pay by September 30 and interest is zero until that date.

“The private student loan market is the wild west of consumer credit in terms of lack of protection, lack of accountability, lack of oversight.”

Seth Frotman, Executive Director, Student Borrower Protection Center

In the 2018-19 school year, about 12% of student loans were non-federal, according to a College Board report.

Private student loans can have interest rates of up to 14%, and because they are private, there is little to no government oversight of the industry. This lack of government regulation can put vulnerable borrowers at risk.

“There really is no reason for the school to even know, in many cases, that a student is taking a [private] student loan, ”said Andrew Gillen, senior policy analyst at the Center for Innovation in Education at the Texas Public Policy Foundation. “People can kind of go out and get a student loan without telling the government or their school.”

When colleges don’t know how students pay for their education, institutions can’t fully advise them on how to borrow wisely. And for students of color, private student loans can be a much longer financial burden than expected.

Related: Some experts have a new idea to help students pay for their college education: no more federal loans

According to the Student Borrower Protection Center report, black students are half as likely as whites to use a private student loan for their studies, but those who do are four times more likely than their white peers to face financial hardship. repayment difficulties. The economic hardships mean that nearly 25% of borrowers in the lowest income bracket do not repay their loans on time, according to the report.

With more families and students out of work, it’s possible that more students will need loans – federal and private – to complete their education.

If students or their parents are made redundant and paying tuition becomes a burden, they will be entitled to more federal help, Gillen said.

“They will have to borrow less private student loans because they will be borrowing essentially more at the federal level,” he said. But there are limits to federal borrowing, and that’s where private lending comes in.

“If they were already going to maximize their federal borrowing, we might see an offsetting trend where they then resort to those private student loans,” he said.

“We’re just forcing more and more people to take not only more credit and debt, but riskier credit and debt to try to keep pace.”

Seth Frotman, Executive Director, Student Borrower Protection Center

Frotman believes there will be an increase in private student loans, based on what happened during the last financial crisis.

“What you saw in the last crisis is that more and more the obligation of higher education has been put on the backs of families, because states have really cut back on their investments in higher education. “, did he declare. “Families have lost savings, the value of their homes and the ability to participate. And you’ve really seen this huge growth in student debt going on. “

There are many unknowns in the private student loan market, in part because many lenders – such as small banks and private non-bank lenders – do not have to adhere to the same public reporting standards that are required for them. federal loans. But what we do know is that for borrowers unable to pay their bills, there is no federal safety net.

“The private student loan market is the wild west of consumer credit in terms of lack of protection, lack of accountability, lack of oversight,” Frotman said.

This story on private student loans was produced by The Hechinger report, an independent, non-profit news organization focused on inequalities and innovation in education. Subscribe to our higher education newsletter.

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