Private Loans Deepen a Crisis in Student Debt

[kurth]

June 10, 2007
Private Loans Deepen a Crisis in Student Debt
By DIANA JEAN SCHEMO

WASHINGTON — As the first in her immigrant family to attend college, Lucia DiPoi said she had few clues about financing her college education. So when financial aid and low-interest government loans did not stretch far enough, Ms. DiPoi applied for $49,000 in private loans, too. “How bad could it be?” she recalls thinking. When Ms. DiPoi graduated from Tufts University in Boston, she found out. With interest, her private loans had reached $65,000 and she owed an additional $19,000 in federal loans. Her monthly tab is $900, with interest rates topping 13 percent on the private loans. Ms. DiPoi, now 24, quickly gave up her dream to work in an overseas refugee camp. The pay, she said, “would have been enough for me but not for Sallie Mae,” her lender.

The regulations that the federal Education Department proposed this month to crack down on payments by lenders to universities and their officials were designed to end conflicts of interest that could point students to particular lenders. But they do nothing to address a problem that many education officials say may have greater consequences — more students relying on private loans, which are so unregulated that Attorney General Andrew M. Cuomo of New York recently called them the Wild West of lending. As college tuition has soared past the stagnant limits on federal aid, private loans have become the fastest-growing sector of the student finance market, more than tripling over five years to $17.3 billion in the 2005-06 school year, according to the College Board. Unlike federal loans, whose interest rates are capped by law — now at 6.8 percent — these loans carry variable rates that can reach 20 percent, like credit cards. Mr. Cuomo and Congress are now investigating how lenders set those rates.

And while federal loans come with safeguards against students’ overextending themselves, private loans have no such limits. Students are piling up debts as high as $100,000. Banks and lenders face negligible risk from allowing students to take out large sums. In the federal overhaul of the bankruptcy law in 2005, lenders won a provision that makes it virtually impossible to discharge private student loans in bankruptcy. Previously such provisions had only applied to federal loans, as a way to protect the taxpayer against defaulting by students.

While federal loans also allow borrowers myriad chances to reduce or defer payments for hardship, private loans typically do not. And many private loan agreements make it impossible for students to reduce the principal by paying extra each month unless they are paying off the entire loan. Officials say they are troubled by the amount of debt that loan companies and colleges are encouraging students to take on. “It’s a huge problem,” said Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers. “When a student signs the paper for these loans, they are basically signing an indenture,” Mr. Nassirian said. “We’re indebting these kids for life.” ...

http://www.nytimes.com/2007/06/10/us/10loans.html

[mike_c]

1. I am indentured to Sallie Mae and the Dept of Education....

Like the woman in the OP, my monthly loan payments are just shy of $1000. I pay more for student loans than I pay for housing each month, and will NEVER be able to buy my own home, even with a professional salary quite a bit higher than the median for my community. In essence, I took out a mortgage on my future in order to get an education (all of it at state universities).

I'd do it again if I had the choice to do it over-- my education was the best investment I could possibly make-- but DAMN it pisses me off that improving my life is just another profit making opportunity for the likes of Sallie Mae.

[greenbriar]

4. I concur

but my payment is half of yours

Sallie Mae owns me

[Iris]

5. I'm confused. What exactly are private loans?

I mean, I use Sallie Mae for my graduate degree and interest rates are nowhere near 13%. My husband also used Sallie Mae and his interest rates were not that high either. I get come-ons in the mail all the time from what I assume are the types of lenders who do charge 13% or higher, but haven't needed to go beyond what I qualify for through federal student loan programs.

[Berry Cool]

7. Then you are smart and lucky.

That's not the case for everyone, or it's not the case due to poor choices they made. You are obviously enrolled in a school where your "eligibility package" matches the cost of your tuition and fees. You look at the come-ons from private lenders and just say no, 'cause you don't need 'em. Smart you are. Others find, or believe, that they cannot afford their schools without taking out private loans, i.e., loans straight from a bank rather than from the feds. Those will cost you, and big, especially if the interest is in the double digits and especially if they have to be repaid immediately after the money has been spent rather than after you finish the degree. You are wise to avoid them. Keep tearing up the offers you get in the mail.

[Iris]

9. Thanks. As you can see in my post below, I wonder if the amount of money available

is just too much. Why do students think they need to have private bathrooms and cutting edge dorm facilities? I just can't help but wonder if our consumer culture hasn't created a generation who is not willing to make due for 4 or 5 years while they develop their minds.

[mike_c]

10. when I was in grad school...

...the financial aid office put together loan "packages" that were a mix of federal student loan money and private, federally guaranteed loans. Most, but not all of those could be consolidated under a Dept of Education program (in my case), but some, for reasons I've never fully understood, did not "qualify" for that program. They were consolidated under a separate, commercial lender at the original interest rate, about 8 percent. None of my loans were originally with Sallie Mae, but after I finished school the commercial loans were bought and sold like candy-- I never paid the same people for more than a year. Sallie Mae currently owns them.

[Iris]

12. Oh. I see. That sounds like a bad deal all the way around.

Like you didn't have any options.

[Javaman]

2. ...

We don't need no education
We dont need no thought control
No dark sarcasm in the classroom
Teachers leave them kids alone
Hey! Teachers! Leave them kids alone!
All in all it's just another brick in the wall.
All in all you're just another brick in the wall.

We don't need no education
We dont need no thought control
No dark sarcasm in the classroom
Teachers leave them kids alone
Hey! Teachers! Leave them kids alone!
All in all it's just another brick in the wall.
All in all you're just another brick in the wall.

"Wrong, Do it again!"
"If you don't eat yer meat, you can't have any pudding. How can you
have any pudding if you don't eat yer meat?"
"You! Yes, you behind the bikesheds, stand still laddy!"

[Berry Cool]

3. A few of pieces of advice for those contemplating college

or those financing those contemplating college...

1. If you're smart, or your kid is smart, or has some sort of other talent, look for SCHOLARSHIPS. Apply for all the scholarships you can possibly get.

2. If you're extremely poor, look at grants, any kind of grants, before looking at loans.

3. If the choice is between a school you can pay for without loans vs. one with loans, pick the one not requiring loans.

4. If the choice is between a school you can afford with only federal/state loans vs. also having to get private loans, pick the one you can afford with federal/state loans.

In short, right now, private student loans constitute usury, and should be avoided at all costs. The only possible worse choices for funding your education would be to do it on credit cards or take out a loan from the Sopranos.

Edited to add: Do not pay for scholarship and grant information. It is freely available. Use the Google. You may be surprised what some organizations will pay you for being or studying, and you won't have to pay it back.

[Iris]

6. Why does it cost so much?

I find it hard to believe that a poor student still can't get through college with a minimum amount of debt. But that might mean living in on-campus housing, forgoing a car, and basically living like a student for 4 years. I'm in graduate school and, yes, tuition is expensive. I have mortgage and other bills, so continue to work full-time. If I were an undergrad or not married, you can bet I'd be living on campus and taking out the most minimum of student loans.

[Berry Cool]

8. On-campus housing can cost a lot, and many students aren't allowed to have cars anyway

because of parking issues.

It's true that students who want to live like kings are going to make college more expensive than it has to be. But part of the trick is finding a school that's affordable in terms of the aid you can get. Students can't afford to enroll just anywhere. They have to be practical and enroll in the school that will give them the best deal financially, and that means trying to avoid private loans at all costs. This may mean shopping around.

[Cleita]

11. In Scandanavian countries students get a free education all the

way through university and Phds if they are eligible. No one has to start their professional lives in debt. We should do that here. This way the best and brightest would be educated, not just the richest or those willing to go into debt to get an education. We used to have such a system in California for all California residents until the Jarvis Ammendment ended that coming from the influence of the Reagan governorship.

[alarimer]

13. Stay away from private loans if at all possible

I had private loans to the tune of about $25K. Took me 15 years to pay off and probably I paid a lot more because the interest rate was 8-12%. I think it may have been calculated per year instead of overall because I think I paid nearly 100% in interest over the life of the loans. I paid almost $400 a month at the beginning (when I was least able to afford it) and much less later on. when I lost my job, there was no forbearance offered. It was tough shit, give us our money. Vultures.

[Deja Q]

14. I've nothing new to say on this issue.

:(