Blog Post | June 18, 2006

The Scary Side of Private Loans

Three disturbing stories about the rise of private student loans:

When a borrower defaults on a federal loan, it affects the school’s overall default rate, which the federal government uses as an indicator of school quality. Willis Hulings, CEO of TERI, a nonprofit guarantor of private loans, told an industry conference recently that some schools are turning to private loans in order to dodge the federal default triggers. The way I heard it from another source, some schools with borderline high default rates in the federal loan program steer particular students — those they fear will default — to private loans so that a default won’t show up in the federal numbers. If, in fact, the student is a default risk, then it is likely that the lender is charging a very high interest rate (unless the borrower has a creditworthy cosigner).

I would bet this second situation is more common: private loans being used for students who don’t qualify for federal loans because they are not making “satisfactory academic progress.” A student task force at the University of Nevada, Reno, reported that as true there. Schools decide what is “satisfactory,” and in UNR’s case it’s a 2.0 GPA. So, essentially, students who are at a high risk of flunking out and not ultimately earning the salaries that will allow them to pay off student loans are getting high-rate private loans. Yikes. I hope their parents are the cosigners.

A third story from a reliable source. Private colleges encourage low-income students to enroll. Instead of putting together a full financial aid package, college officials suggest they go ahead and attend, paying tuition on an installment plan, which is commonly offered at many colleges. The students complete the coursework, but cannot pay the tuition, and ultimately determine that they cannot afford to continue at the college. So they decide to transfer to a lower-tution option. But they can’t transfer, because the college won’t release the transcripts until they’ve paid the tuition. They’re stuck.

To some degree, these types of problems can be reduced through vigilant oversight by regulators and the media. One good example is the private loan scandal at Lehigh Valley College in Pennsylvania last year.