Private Loans Deepen a Crisis in Student Debt

 

This is an area that cries out for government oversight.  Countless studies of investing and human behavior when it comes to financial decisions (a field called behavioral finance; to read a presentation and articles I've written on this, see: http://www.tilsonfunds.com/behavioral_finance.php3) show that most people are hard-wired to be highly irrational when it comes to money, which financial institutions like check cashers, credit card companies, mortgage brokers and, apparently, student lenders exploit (in the perjorative sense of the word).

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.

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June 9, 2007

Private Loans Deepen a Crisis in Student Debt

 

By DIANA JEAN SCHEMO

Published: June 10, 2007

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

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.