Know Before You Owe: The Danger of Private Student Loans
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- By Stacey Bumpus
- May 7, 2012
Excessive student debt has practically become synonymous with college in recent years. Study after study shows that students are taking on more debt than they can reasonably pay off just to attend school, even though they’re not promised a high-paying career after graduation.
Private student loans in particular have driven students into debt due to higher interest rates. Recently, Congressional senators stepped forward with legislation that could help educate students on how these loans work, which would hopefully drive down debt in the long run.
U.S. Student Debt Surpasses $1 Trillion
In 2010, news that student loan debt had surpassed credit card debt shocked the masses. At the time, credit card debt was estimated at $826.5 billion, while student loan debt had pushed passed it to a whopping $829.785 billion, according to FinAid.org.
Experts knew the numbers were quickly rising, so it was no surprise when the Consumer Financial Protection Bureau (CFPB) announced that student loan debt topped $1 trillion in 2011.
What most didn’t realize, however, was how many borrowers were unable to keep up with their payments. According to the CFPB, one in four student borrowers who had begun repaying their education debts were behind on their payments.
The interest rates associated with private student loans in particular have made it nearly impossible for borrowers who are unemployed or underemployed to keep up with their payments. As a result, debt continues to mount.
Private Student Loans Create More Debt
Private student loans have traditionally been the last resort for college students looking for financial assistance — and for good reason, as they are definitely less desirable than federal student loans.
Private loans are only meant to serve as a bridge between the actual cost of your education and the amount the government will allow you to borrow. Here are a few characteristics of these loans that distinguish them from their federal counterparts:
- Variable interest rates: Unlike federal student loans that offer low fixed interest rates, private student loans typically come with higher variable rates that often cost more over the course of the loan term.
- Credit checks: Another aspect of private loans that students have to worry about is the credit check. Because private student loans are offered by private lenders, the lenders reserve the right to check your credit to determine your risk of default.
- Repayment and forgiveness: Typically the repayment and forgiveness (deferment and forbearance) options for private loans aren’t as lenient as they are for federal loans.
While it may seem that private student loans are by far the worst choice among loan options, there are a couple of perks that encourage students and their parents to opt for them anyway.
Private loan options can sometimes be most beneficial because they allow parents and/or students to defer repayment until graduation. Also, unlike federal student loans, individuals who acquire private loans don’t have to fill out FAFSA forms.
But lawmakers say the pros of private student loans typically don’t outweigh the cons, since more students fall into high debt due to the unpredictable interest rates and less flexible loan terms. It’s for this reason that two lawmakers have created legislation to private students with more education.
Know Before You Owe Act of 2012
On March 29, Senators Dick Durbin (D-Ill.) and Tom Harkin (D-Iowa) announced their intention to educate students about the realities of private student loans by introducing the Know Before You Owe Act of 2012.
The legislation would serve as an amendment to the Truth in Lending Act, and would require institutions of higher education to inform students of the following:
- Federal financial aid availability and eligibility
- Ability to select a private lender of their choice
- Impact of a private loan on their eligibility for other forms of financial aid
- Right to accept, reject or cancel a private loan as allowed under current law
- Terms and conditions of federal and private student loans
The senators would also implement rules for private lenders, including a requirement to certify with the borrower’s school that the student is enrolled, along with the amount the student is eligible to borrow before issuing a loan.
Lenders would also have to provide borrowers with quarterly updates on their loans, including accrued but unpaid interest, as well as capitalized interest. They would also have to report information about the student loans they issue to the CFPB.
Supporters believe that the improved education would help students understand their options and make more informed choices that can help them save a ton of money on their personal student loans.
Currently, the bill is in the first stage of the legislative process. Senators Durbin and Harkin are encouraging people to e-mail their Congressional representatives and senators to get them on board with supporting the bill, so that it can be passed into law.