Private student loans are scrutinized

Megan Connors of Harford County, Md., says she got a great education at Auburn University but a brutal lesson on private student loans.

Federal aid wasn’t enough to cover four years at the school in Alabama, so Connors made up the difference with private loans. portal website . Now, four years after graduation and working as a prekindergarten teacher a job far afield from her major she struggles to repay about $ 101,000 in private loans.

“If I knew I would be in this much debt, I probably wouldn’t have pursued a four-year degree,” said Connors, 30. Her parents, who are retired, help with the loan payments.

Granted, Connors’ case is unusual. But it’s a dramatic example of how some young adults have relied on private education loans to fulfill a college dream, not realizing the long-term financial consequences to themselves and the family members who co-sign.

It’s an issue that has long concerned student advocates and now Congress.

The Dodd-Frank law requires the Education Department and the new Consumer Financial Protection Bureau to report on private education loans by July. As part of that, the consumer bureau recently announced it was seeking answers from students, schools and lenders to a series of questions.

Among them: Where do families learn about private loans? Why do students take out these loans before making full use of federal aid? Do private lenders provide adequate disclosures? How does debt affect a graduate’s career choice?

“The private student loan market is one of the least-understood consumer credit markets,” Raj Date, the bureau’s acting leader, said. “It has been operating in the shadows for too long.”

Agreed. It’s about time we have a national discussion not only about private loans, but about paying for college and whether we are preparing teens well enough to make these big financial decisions that will affect them long into their future.

In Connors’ case, her debt has affected her career.

She studied criminology at Auburn but hasn’t found work with the federal government, which checks credit reports for security positions.

“When they find out about your student loan debt and how much you owe, they don’t want to take a chance on you,” she said. Interviewers, she said, have told her that she is “too much of a risk.”

Private loans aren’t closely tracked like federal aid, so it’s difficult to know the extent of borrowing and the impact on young adults.

A recent study by the Project on Student Debt found that about one out of seven undergraduates took out a private loan for the 2007-2008 academic year, the most recent figures voluntarily reported by schools.

The majority of students resorted to private loans before fully taking advantage of federal loans. Worse, some didn’t even bother with federal loans.

“It’s much like taking out a subprime mortgage when you are eligible for a prime mortgage,” said Pauline Abernathy, vice president with the Institute for College Access & Success, a nonprofit policy group.

Federal loans are far more consumer-friendly and should be a family’s first choice if there is a need to borrow.

Government loans carry a fixed interest rate, whereas private loans have a variable rate that can go up and increase students’ payments.

And Uncle Sam offers loan forgiveness, deferments for the unemployed and an income-based repayment plan that can sharply reduce payments if income is too low to manage the debt.

So why do students turn to private loans?

Sometimes they don’t understand the difference between the two types of loans, experts say, or families with strong credit are able to get a lower interest rate with a private loan.

“A lot of it is advertising,” said Mark Kantrowitz, publisher of FinAid.org, an online provider of aid information.

For instance, if you search for student loans on Google, all sorts of ads pop up promising “fast” or “no co-signer” private loans.

But there is also the misconception that families earn too much to qualify for federal assistance, Abernathy said.

Sure, only those in need receive subsidized federal loans, on which the government pays the interest while students are in school. But all dependent undergraduates even the offspring of millionaires can borrow a total of $ 31,000 in unsubsidized loans.

The government won’t pick up the interest, but the loans carry the same borrower protections.

Justin Draeger, president of the National Association of Student Financial Aid Administrators, said schools had a responsibility to help students understand the terms and conditions of all loans. But sometimes schools aren’t aware of all student borrowing.

Schools now must certify federal loans, meaning they determine how much students are eligible to borrow. But there’s no such requirement with private loans, Draeger said, so aid officers don’t always know upfront if students are overextending themselves or need additional counseling.

Draeger said his group would advise the consumer bureau to require that private loans be certified by schools to prevent overborrowing.

This also has the support of student advocates and loan giant Sallie Mae, which already asks schools to certify its private loans.

• Private Student Loans Being Used More Often to Pay College Costs

  by Embajada de Estados Unidos en Bolivia Private Student Loans Being Used More Often to Pay College Costs Article by Jeff Mictabor According to a ...

• Public Schools No Longer the Answer for Students Drowning in Debt

  A lot has been said about the severity of the student loan debt crisis in the U.S., but much of that has been about the ...

• Examine The options for Student Loan

  When choosing to attend a college or school, there are several monetary factors in which play a part within the amount of money it will ...

• College students trapped with big debt and few jobs after attending expensive …

  After getting her G.E.D. at Lawson State Community College in Bessemer, Ranisha Richardson of Birmingham set her goals a little higher.Encouraged by TV ads touting ...

• The other student loan problem: too little debt

  LONG BEACH, Calif. (AP) — Jesse Yeh uses the University of California-Berkeley library instead of buying textbooks. He scrounges for free food at campus events ...