Risky Private Student Loans Akin to Subprime Mortgages, Study Says

It has been a challenging time for recent graduates trying to begin their professional lives in a down economy. According to a recent study that was released by the Education Department and the Consumer Financial Protection Bureau, the rising cost of student loans is only making the situation that much more challenging because graduates are stuck with exorbitant payments that they cannot afford.

After studying over 5 million student loans issued between 2005 and 2011, the organizations determined that private student loans have become more popular in recent years. In fact, there were $5 billion in private student loans issued in 2001 and, by 2008, the amount of such loans had skyrocketed to $20 billion. As a result of this increase, consumers around the country currently owe a total of over $150 billion in private student loan debt, leading many to bankruptcy.

Private student loans are problematic, the report says, because they can cost substantially more than public student loans since their interest rates are much higher and monthly payments can go up without notice. In addition, many private lenders disbursed these student loans without any consideration of the borrowers’ ability to pay after graduation, leading to billions of dollars in loan defaults.

Also, the report compared the practices of these lenders with those who issued subprime mortgages. Like their predecessors, private lenders bundled their loans and sold them to investors so that they would not lose money when students defaulted on their loans.

The Private Student Loan Explosion

Although many students could have been eligible for federal student loans – which have lower, fixed interest rates – the amount of private student loans increased exponentially in recent years. According to the report, this is primarily because lenders have changed the way they market their products to students. Instead of going through college financial aid offices, private lenders implemented “direct to consumer” lending practices, sending advertising directly to students. As a result, students were not aware that they could qualify for more affordable federal loans, scholarships and other financial aid – information that they would have received from their schools’ financial aid offices.

Private lenders also did not disclose the terms of these student loans until after the loan had been approved. As a result, students were not aware of the variable interest rates until it was too late. Fortunately, students may qualify for debt relief assistance.

Get the Help You Need

If you are having trouble paying back your student loans, help may be available. Although student loan debt cannot be discharged in bankruptcy, filing for bankruptcy may be an option to help you manage your other debts. Consult a qualified bankruptcy attorney to advise you of your rights and help you make the best decision for your financial situation.