WASHINGTON (AP) — Risky lending caused private student loan debt to balloon
in the past decade, leaving many Americans struggling to pay off loans that
they can’t afford, a government study says.
Private lenders gave out money without considering whether borrowers would
repay, then bundled and resold the loans to investors to avoid losing money
when students defaulted, according to the study, which is being released
Those practices are closely associated with subprime mortgage lending, which
inflated the housing bubble and helped bring about the 2008 financial
“Subprime-style lending went to college, and now students are paying the
price,” said Education Secretary Arne Duncan, whose department produced the
report with the Consumer Financial Protection Bureau.
Duncan said the government must do more to ensure that people who received
private loans enjoy the same protections as those who borrow from the
Student loans fall into two main categories: Loans directly from the
government and those offered by banks and other private financial companies.
The report focused on private student loans, which spiked from $5 billion in
loans originated in 2001 to more than $20 billion in 2008. After the
financial crisis, as lending standards tightened, the market shrank to $6
billion in 2011.
American consumers still owe more than $150 billion in private student loan
debt, the study said. Including federal loans, Americans now owe more than
$1 trillion in student loan debt, according to the CFPB. It has surpassed
credit card debt as the biggest source of unsecured debt for U.S. consumers.
Private student loans are riskier than federal loans, the study said. They
often carry variable interest rates, which can cause monthly payments to
rise unexpectedly. Federal loans offer fixed interest rates.
In many cases, if a borrower is unable to repay, federal loans can be
postponed or reduced. Those options are rare for private loans, the study
Students often did not understand the difference between federal and private
loans, the study said. That caused many to take out costly student loans
when they were eligible for cheaper, safer government loans.
The study highlights a unique feature of student debt: Unlike other credit
card balances and most other debt, it is nearly impossible to cancel student
debt by filing for bankruptcy. That leaves many borrowers trapped, behind on
loans that lenders are unwilling to modify, the study said. There are more
than 850,000 private loans in default, worth more than $8.1 billion, it
“Too many student loan borrowers are struggling to pay off private student
loans that they did not understand and cannot afford,” said Richard Cordray,
director of the Consumer Financial Protection Bureau. The CFPB was created
in the wake of the financial crisis to protect people against unfair loans,
unexpected fees and other financial threats.
Lending standards for private student loans were loose during the credit
bubble of the mid-2000s, the report said. Because private lenders marketed
directly to students, bypassing school financial aid officers, schools did
not review borrowers’ financial needs or enrollment status. As a result,
many borrowed far more than they needed to pay for tuition. The loans went
to people with increasingly weak credit scores, making repayment less
likely, the study said.
The report is based on data from nine lenders on over more than 5 million
loans made between 2005 and 2011, as well as data from five nonprofit
lenders. It was required under a sweeping overhaul of financial rules passed
by Congress in 2010.
It said that
lenders have been more careful since the financial crisis reduced the amount
of credit available. For example, in 2011, more than 90 percent of private
student loans required a co-signer, compared with 67 percent in 2008.