Private Student Loans Under Scrutiny
The brief makes the claim that private student loans are like credit cards with high penalties, fees and marketing geared toward students regardless of need.
"While most of that debt is in safe, lower-interest federal loans, a significant amount is in private loans that can carry interest rates of over 18%. In fact, due to aggressive marketing, nearly three million American students took out private loans last year, up from less than one million just four years before. Since federal loans are lower interest and have more borrower protections, taking out unnecessary private loans for college is like putting tuition on a high-interest credit card that students can't pay off for years, the article stated.
The article focused mainly on the lending practices of for-profit schools.
"The cohort default rate, put out by the Department of Education, shows that for-profit colleges have a high default rate on student loans with low graduation rates. This is a whole separate industry from what we target. We could have made a lot more loans than we wanted to, but with the for-profit school business model, it's difficult to create a win-win partnership for the school, borrower and credit union," said Jon Jeffreys, president of private student lending CUSO CU Student Choice.
The article makes the argument that private student loans are profitable to for-profit colleges even if the student defaults on the loan because loans increase enrollment.
"For predatory lending to flourish, you have to have a lack of knowledge and a lack of supply. We're trying to bring new lenders in and get information back to the student," said Vince Passione, CEO of student lending solutions and technology provider Fynanz.
Other predatory practices in the private student lending market the article outlined include unnecessary loans, high interest rates, rate floors, high fees and in-school interest.
Both Jeffreys and Passione said that to get the message out that their programs are trustworthy, they work with schools to make sure each loan is needed.
Passione shared a story of one loan application his firm received for a $25,000 loan when the student already had federal loans and grants and only needed a $1,000 loan to cover the rest of the cost of tuition. It turned out, Passione said, that the student lived off campus and needed a loan to buy a car.
"In the process of certifying our loans the schools make sure the loan is used for the right things. We see what they are eligible for and make sure every option is exhausted," he added.
Even though each credit union sets its own rate in the CU Student Choice program, the average rate is around 6%, Jeffreys said. He also added that he is against origination fees because they are very confusing to students.
To read the full brief visit www.demos.org.