Interest rates on private loans are typically variable, like on a credit card, and over the life of the loan much higher than the fixed rates on federal student loans. Lower income students usually receive the worst rates and terms, and private loans do not have the important borrower protections and repayment options that come with federal loans. We recommend the changes below to reduce reliance on risky private loans and to enhance protections for borrowers who have such loans. For more information, see our publications and resources related to private loans.

Prevent unnecessary private loan borrowing by requiring school certification of private loans

More than half (53 percent) of undergraduates who borrow private loans could have borrowed more in safer federal student loans. Unfortunately, many students who borrow private loans – and the family members who co-sign them – don’t understand the difference between federal and private loans until it is too late. Requiring private lenders to confirm a borrower’s eligibility with his or her school before disbursing the loan ensures the student is eligible for that loan. It also gives the school a chance to help the student make an informed borrowing decision. Students, schools, and lenders, as well as the CFPB and the Department of Education, have all endorsed requiring “school certification” of private loans, including notifying the student of remaining federal aid eligibility before the loan is certified. We urge the Department and the CFPB to require such certification for all private loans, and we support legislation (S 3205, H.R 6352) introduced in 2018 that would require it as well.

Treat private loans like other consumer debt in bankruptcy

Since 2005, it has been far more difficult to discharge private loans than credit cards and other consumer debt in bankruptcy. This leaves most private loan borrowers at the mercy of the lender if they face financial distress due to unemployment, disability, illness, or military deployment, or when a school shuts down before they can finish their certificate or degree. We are part of a broad coalition that supports legislation (S. 1262, H.R. 2527) to restore fair bankruptcy treatment to private loan borrowers.

Increase community college students’ access to federal student loans

Nearly one million community college students can’t get a federal loan if they need one, because their school does not participate in the federal loan program. While many community college students can avoid borrowing, those who need to borrow to stay and succeed in school should have access to the safest, most affordable option: federal student loans. Without access to federal loans, students may turn to risky and expensive private loans or credit cards, or they may drop out, work excessive hours, or take fewer classes – choices that reduce their odds of earning a degree or certificate. Federal and state policies should encourage commu­nity colleges to participate in the federal loan program and better support them in helping students make informed borrowing decisions.