Private Student Loans: A Last Resort That’s Too Often Used First

(Originally posted at Caveat Emptor)

Private student loans are more expensive, riskier, and come with fewer borrower protections than federal student loans.  Nevertheless, almost two-thirds of the undergraduates who took out private student loans during the 2007-2008 school year did so without first obtaining the maximum federal loans for which they were qualified.   In fact, over one-quarter of students who took out private student loans took out no federal loans at all.  This is the most dramatic single finding highlighted in “Private Loans: Facts and Trends,” a report released last week by the Project on Student Debt. 

And we’re not talking about just a few students here.  The U.S. Department of Education survey on which the report is based is done every four years.  Between the 2003-04 survey and that for 2007-08, the share of all undergraduates who had private loans rose from 5% to 14%, while the actual number of private loan borrowers more than tripled, from less than one million to nearly three million (2,946,000) students.

The press release announcing this report also criticized the  Federal Reserve Board for failing to incorporate the recommendations of advocates into its recently-released requirements for private student loan disclosure.  These recommendations, provided by The Institute for College Access and Success (TICAS) and ten other national consumer advocacy organizations including AFFIL, would have greatly decreased the likelihood that students would sign up for private student loans without being aware of the safer and less expensive federal option.  For more on this:  a TICAS summary of the new disclosure requirements, the advocates’ recommendations, and Fed’s final rules.

This is, of course, just one more illustration of the Fed’s inability or unwillingness to provide meaningful protections from abusive consumer lending.  It provides one more reason for supporting the Obama administration’s proposed to create a Consumer Financial Protection Agency empowered to write and enforce effective rules for all kinds of consumer lending, including private student loans.