Nearly 30 education and advocacy groups sent a letter yesterday to the director of the Consumer Financial Protection Bureau urging more safeguards be put in place to protect students from unnecessarily taking out private student loans.
Calling private loans “one of the riskiest, most expensive ways to pay for college,” the letter says the loans are like credit cards, typically with variable interest rates that are higher for those who can least afford them.
With private lenders marketing loans with variable rates starting as low as 2.25 percent, students may mistakenly assume that such loans are more affordable than federal loans with a fixed rate of 6.8 percent. Requiring school involvement now is “critical to prevent a resurgence of the reckless and deceptive private lending practices common before the recent financial crisis,” the letter says.
The organizations, which include the National Education Association, Consumers Union, Higher Education Policy Institute, and the American Association of State Colleges and Universities among others, is asking the CFPB ro require all private loan lenders to get school certification before disbursing a loan. This means getting confirmation from the school that the student is enrolled, how much they’re eligible to borrow, and that the school has counseled them if they have any untapped federal aid eligibility.
The most recent information indicates that 68 percent of all private education loans are “school certified.” The self-certification procedures now in place don’t adequately protect borrowers because there is no mechanism to ensure that the information provided is correct, the letter states.
The groups advocating a change are calling on CFPB Director Richard Cordray to use his authority under the Truth in Lending Act (TILA) to require school certification and counseling before private education loans are disbursed.
Before turning to the private market, students are encouraged to take out federal loans because they are generally more affordable and have important protections, including flexible repayment plans, unemployment deferments, closed-school cancellations, forgiveness programs, and death and disability discharges.
Private loans make up $150 billion of the more than $1 trillion in outstanding student-loan debt, and they are growing in popularity. The percentage of all undergraduates with private loans has increased from 5 percent in 2003-04 to 14 percent in 2007-08, according to the Project on Student Debt.
A recent survey of recent college graduates found that about half were surprised by the debt they had accumulated, indicating a need for additional education around student-loan borrowing.
As high school students consider colleges, affordability is increasingly a top consideration in their decisionmaking process.