Tags: Subprime | Mortgages | student | Loan

US Report: Like Subprime Mortgages, Private Student Loan Debt is a Mess

By    |   Friday, 20 July 2012 01:01 PM

Private student-loan debt is a lot like the subprime-mortgage mess.

Loose underwriting, misinformed borrowers, loans that borrowers cannot possible pay back. It all seems remarkably familiar. And like the subprime-mortgage debacle, loose lending standards are causing defaults to skyrocket.

Outstanding student-loan debt topped $1 trillion in 2011, including $864 billion in federal government loans and $150 billion in private student loans, according to a new report from the U.S. Department of Education and the Consumer Financial Protection Bureau (CFPB), an agency established under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

Overall, there are now more than $8.1 billion in defaulted private loans, representing more than 850,000 loans.

Many student borrowers might not have fully understood their loan terms or that federal loans offer better terms, according to the study. For instance, private loans usually charge higher interest rates and are hard to discharge in a bankruptcy.

In addition, lenders increasingly marketed directly to students, bypassing schools. Many students also borrowed more than they needed, and lenders lowered minimum credit score standards.

"These trends made private student loans riskier for consumers," the report stated.

Like mortgage lending, the private student loans business goes through boom and bust cycles. Private student loans grew from less than $5 billion in 2001 to more than $20 billion in 2008, and then fell to less than $6 billion in 2011.

Since 2008, when investors began pulling out of the market, lending requirements have tightened. For instance, more lenders require loans to be co-signed. In 2011, 90 percent of private loans were co-signed compared with 67 percent of private loans in 2008.

"Subprime-style lending went to college and now students are paying the price," said Education Secretary Arne Duncan. "We still have some work to do to ensure that students who take out private student loans have the same kinds of protections offered by federal loans. In the meantime, if you have to take out a loan to pay for college, federal student aid should be your first option."

The Education Department and the CFPB are asking Congress to beef up regulations on private lending and help students understand their loan terms.

They have also urged Congress to reconsider the treatment of private loans in bankruptcies, The New York Times reported.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

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Friday, 20 July 2012 01:01 PM
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