Private loans for students can become traps
Kara McGuire, Star Tribune
Issue date: 9/30/09 Section: News
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But for some, there is nothing good about private student loans. Just ask Kristi Nelson and Jennie Fisher. Nelson graduated from St. Paul's College of Visual Arts in 2003 and has $55,000 in private student loans.
Fisher asked her father, John, and her grandmother to co-sign her private loans to attend the Minneapolis College of Art and Design; they owe more than $88,000. They're all struggling to make monthly payments and are closely watching renewed efforts to make private student loans dischargeable in bankruptcy court.
The term "private student loans" can be confusing. It's sometimes used to refer to the Federal Family Education Loan Program (FFEL), the government student-loan program that's administered by private companies such as Sallie Mae and Wells Fargo. FFEL loans made news earlier this month when the House passed a bill that would remove the banks and lenders that act as middlemen and have the government handle the loans directly instead.
The private loans, or alternative loans that have Nelson and the Fishers scrambling to make debt payments, are different. They work more like credit cards, with variable interest rates as high as 18 percent and terms set by the lenders. Such loans have far fewer protections and guarantees for borrowers than do government-sponsored loans. Some critics consider private student loans to be the subprime products of higher education.
Because the cost of college has grown faster than the amount of federal loan money available, more and more students are relying on private loans to pay a part of their education. Private loan volume grew from $7.7 billion in 2003-04 to $22.4 billion in 2007-08, according to a policy paper by financial aid expert Mark Kantrowitz.
Consumers often "assume that something being called a student loan makes it inherently safe, and that's simply not the case," said Lauren Asher, president of the Project on Student Debt.
Asher testified before the House Judiciary Committee on Wednesday about the need to treat private student loans like credit cards and other consumer debt in bankruptcy court. Unlike the consumer who racked up too much credit card debt and the homeowner who took on an unaffordable mortgage, college graduates with too much student loan debt cannot, in most cases, discharge the loans in bankruptcy.
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