Private Loan Borrowers Need Increased Protections

The rise in private loan borrowing among undergrads may indicate a lack of awareness of federal loans.

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In last week's blog post we mentioned (not for the last time) how important it is to max out federal loans before taking out private loans. We also promised to follow up on the Department of Education's recent report, "The Expansion of Private Loans in Postsecondary Education," which shows students are, unfortunately, not taking our advice. Because the Student Loan Ranger never forgets (okay, sometimes we forget, but not this time), we're doing just that.

The report contains a number of interesting findings, but we are going to focus on the disturbing rise in private loan borrowing among undergraduates from 2003-04 to 2007-08. From 2003–04 to 2007–08, the percentage of undergraduates obtaining private loans rose 9 percentage points (from 5 percent to 14 percent) while borrowing from all loan sources rose only 5 percentage points (from 34 percent to 39 percent).

In fact, 54 percent of all undergraduate loan borrowers did not exhaust their annual eligibility for Stafford loans before taking out private loans. Of that 54 percent, 12 percent did not even apply for federal financial aid; 11 percent applied for federal aid, but didn't end up taking out a Stafford loan; and 31 percent borrowed less than the maximum amount of Stafford loans.

[Learn more about Stafford loans.]

Why would students choose private loans that lack the important protections provided by federal loans when they don't have to? We don't think it's because of the enticing nature of borrowing tens of thousands of dollars every year for four years (or more).

As "The Expansion of Private Loans" notes, students may be unaware of federal loan programs or confused or daunted by the federal loan application process. Private lenders may also be recommended by higher education institutions' financial aid offices. It may also be the case that some students aren't clear on the importance of borrower protections and things as simple as a fixed interest rate. (In our experience, many students only come to this realization years later after they enter repayment.)

Because we think students should be armed with the necessary tools to conduct a cost-benefit analysis before they borrow, we're big supporters of the Consumer Finance Protection Bureau's (CFPB) Know Before You Owe initiative, which aims to improve the information schools present to prospective students and their families. Make sure you go to the Know Before You Owe site and give feedback on what works and what doesn't work.

[Get more tips and advice on paying for college.]

In the meantime, as long as private loans are out there and necessary for some, we also need to see the return of some borrower protections, like the Fairness for Struggling Students Act of 2011 and the related Private Student Loan Bankruptcy Fairness Act of 2011 that we highlighted earlier this year. We urge you to tell your representatives and senators how important it is to get behind these bills.

And don't forget that, due to stories about students graduating with big private loans, the new CFPB has called for borrowers to share their private loans stories. The CFPB has rule-making authority over private student loans, so please help us spread the word and E-mail your story to the CFPB at CFPB_StudentsFedReg@cfpb.gov before the January 16 deadline.

Finally, don't doubt that you can make a difference. At least partially because of voices like this student loan borrower speaking up through broad-based movements like Occupy, we recently have seen positive changes made to federal student loan programs that will ease the educational debt burden of some borrowers. We aren't the only ones who think action can have an impact: Time magazine named the protester the 2011 Person of the Year.

We hope you have a great holiday season and can forget about your student loans for at least a little while. The Student Loan Ranger, of course, doesn't have the luxury (or the ability!) to forget. Make sure you take full advantage of the work we do by staying connected with us on Twitter (@EJW_org #studentdebthelp) and Facebook and attending one of our upcoming student debt webinars.

Isaac Bowers and Radhika Singh Miller work in the Communications and Outreach unit, responsible for Equal Justice Works' educational debt relief initiatives. They conduct monthly webinars; advise employers, law schools, and professional organizations; and work with Congress and the Department of Education on federal legislation and regulations. Isaac received his J.D. from New York University School of Law and was previously a fellow at Shute, Mihaly & Weinberger LLP. Radhika graduated from Loyola Law School Los Angeles and was previously a staff attorney at the Partnership for Civil Justice.