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Private student loan report: Is subprime mortgage crisis comparison fair?

A new government report says the private student loan market suffers from risky terms and lax underwriting, paralleling the subprime mortgage debacle.  Private lenders say the criticism is out of date.

By Staff writer / July 20, 2012

A new government report casts the private student loan market in the past decade as parallel in many ways to the subprime mortgage debacle – rife with risky terms, lax underwriting, and aggressive direct marketing to borrowers who often didn’t fully understand their options.

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“Our findings reveal that students were yet another group of consumers that were hurt by the boom and bust of the financial crisis,” said Richard Cordray, director of the year-old federal Consumer Financial Protection Bureau (CFPB), which issued Friday’s report in conjunction with the US Department of Education.

The report is prompting renewed calls for tighter regulation of private student loans and a stronger safety net for borrowers – including bankruptcy options. But representatives of private lenders say that the share of student loans they issue has dramatically declined, and that regulations and voluntary practices in recent years provide sufficient protection.

Among the report’s findings:

  • The private student loan market grew from less than $5 billion in 2001 to more than $20 billion at the peak in 2008, then rapidly contracted during the financial crisis.
  • Some lenders bypassed school financial aid offices, marketing directly to students, and often lowering the minimum credit score required. There was little incentive to ensure the loans could be paid back, the report suggests, because lenders made their money up front by bundling and selling loans.
  • Many students did not understand or take advantage of their eligibility for less risky federal loans before taking out private loans.
  • Most private loans have few options for payment modification or forbearance.
  • More than 850,000 private student loans are in default, representing $8.1 billion. Since 2005, discharging private loans in bankruptcy has been nearly impossible.

“The report is a call to action to protect students and families from risky private loans, provide relief for those who are now trapped because of reckless and deceptive private lending, and encourage the use of safer federal loans,” said Lauren Asher, president of The Institute for College Access & Success, in a statement.

Casting private lenders in a negative light with the use of terms like “subprime” isn’t necessarily fair, given that the federal government, which makes a far larger volume of student loans, also lent to most of the same borrowers who turned to private loans, says Jason Delisle, director of the Federal Education Budget Project at the New America Foundation in Washington.

Students, by definition, often have low credit scores or no credit history. “Does that mean the federal government is a subprime lender? Policymakers should be careful in how we characterize this [issue] because [it could] undermine support for the federal student loan program,” Mr. Delisle says.


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