Private Loans

Companies offering private student loans advertise low rates, but the rates they actually charge to individual borrowers, and how they determine those rates, are closely-held trade secrets. The rates are based on borrower credit scores and other factors; ultimately, companies maximize their returns by trying to charge the highest rate they can while still getting the business. One way to determine the actual rates being charged on private student loans is to review the prospectuses that accompany portfolios of loans that are sold to investors. We looked at four recent portfolios from Sallie Mae, and one Fitch Ratings review of a portfolio from the National Collegiate Student Loan Trust. These portfolios revealed average interest rates today of 9.77%, 9.91%, 10.0%, 10.11% and 10.35% (based on a today's Prime rate of 8.25% and a 3-month LIBOR rate of 5.47%). Many borrowers, at least 15% of them according to the investor reports, are charged interest rates of more than 12%. These rates are variable, so as interest rates in the economy increase, so do the rates paid by the borrowers.

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The economicdiversity.org database includes campus-by-campus data on the total student loan debt of graduating seniors. The numbers come from the Common Data Set, and are reported by the campuses to the various publishers of college guides. The instructions to campuses tell them to include private loans in the total. But at a recent meeting between campus data-keepers and the publishers, it became clear that some campuses have a better handle than others on the amount of private loans being made to their students. To be clearer about the totals in future data collections, the Common Data Set will, in the future, ask campuses to provide separate totals for federal and private loans; some campuses will input a "not available" in the private loan field. One solution to this data problem would be for the feds to require that private loans be certified by the college in order to qualify for the tax deduction on student loan interest. That way, financial aid administrators would be able to track who has private loans, and how much students have truly borrowed. They would also be able to check to make sure that the student isn't making a mistake by signing up for a high-rate or otherwise undesirable loan. This might also help borrowers down the line, since many don't know the differences between federal and private loans, and are unclear as to which they have. If aid administrators had more information, they could more easily advise students about the risks and tradeoffs of alternative loans.

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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.

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Private student loans are not just an asterisk in the loan data anymore. And they're not just for law and med students, either. According to our Project on Student Debt, the numbers in 2003-4 stood at: --5% of students in public four-year colleges took out private loans (compared to 43% federal); --11% of students in private four-year colleges (compared to 54% federal); and, --15% of students at for-profit colleges had private loans (compared to 80% federal). Are those numbers going to continue to rise? At an industry conference a few days ago, more than one expert predicted that private student loans could overtake federally-backed loans in six or seven years' time. Getting accurate, up-to-date data on private loans is tricky. Those 2003-4 figures are from a survey conducted by the National Center for Education Statistics -- but the surveys are conducted only every few years. What has happened with private loans in 2005 and 2006? For 2005, the College Board estimated, based on a survey of loan companies, a one-year increase of 30 percent in private loans. Colleges continue to report (and sometimes facilitate) the growth in private loans. According to a student task force report posted on Student Debt Alert, UMass Boston had a 56% increase in the number of private loans between 2003-4 and 2004-5 (from 368 to 576). At the lender conference I attended, the financial aid director from Michigan State University reported an increase in private loans from $12.7 million in 2004, to $20.6 million in 2006, a 63% increase. Schools do not necessarily know whether their students have taken out alternative student loans. Some loans are made through the financial aid office. But a number of lenders are direct-to-consumer ("DTC" in the lender world). They require some proof of enrollment, but in some cases that can be a copy of paid tuition bill, or just an electronic data match with the National Student Clearinghouse. In those cases, the loans won't show up in schools' tallies of loans to their students.

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