Getting into the right college can be tough, but when you consider the growing number of student-loan defaults and delinquencies, paying for it can seem even tougher.
According to the Consumer Financial Protection Bureau (CFPB), over a quarter of all student-loan borrowers can’t keep up with monthly payments. While most cases are a result of low employment in a down economy, a new report reveals that the same shady lending practices that led to the subprime mortgage collapse have also plagued private student loans.
The report, a joint effort between the CFPB and the Department of Education, examines both federal and private student borrowing over the last decade. Private student loans (PSLs) represent a small slice of the student-loan market, but from 2005 to 2007 this type of borrowing increased dramatically.
Most student borrowing comes from federal loan packages, but PSLs were developed to fill the gap in eligibility where federal money falls short. For many students, PSLs are essential to financing their higher education, but analysts say that during this period, borrowing practices got out of hand—and both lenders and schools played the system for profit.
“Fueled by investor appetite for asset-backed securities, the financial institution private student-loan market grew from less than $5 billion in 2001 to over $20 billion in 2008, before contracting to less than $6 billion in 2011,” states the report.
During the credit boom, even borrowers with poor credit could score a school loan, sometimes for much more than they needed. But just like in the housing collapse, inexperienced borrowers got in over their heads. Bad loans flooded the market, and students and families were saddled with a financial obligation they didn’t understand.
Changes have been made to the system since then, but CFPB Director Richard Cordray is looking to lawmakers to do more. He is calling for a break for borrowers who were put deep in debt.
“Borrowers who took out loans at the height of the boom are still suffering from those excesses,” Cordray said in a press conference.
Coupled with this easy-credit environment, researchers found a notable lack of guidance. Analysts say that even with PSLs, schools typically monitor student financial decisions, helping families navigate borrowing struggles with appropriate recommendation. But analysts found that school monitoring appeared to diminish at the same time that PSL numbers rose. As a result, many students borrowed far more than they needed, at rates they otherwise would have been counseled to avoid.
In some cases, schools worked against students. Before the financial reforms of 2008, analysts reported numerous “inappropriate relationships” between schools and lenders. In exchange for travel opportunities and stock options, lenders would gain coveted spots on a school’s preferred lender list. An investigation by the Iowa Attorney General found that the state PSL provider actually encouraged students to take out higher-cost loans. Colleges who directed students to this preferred provider were compensated for their effort.
Today, PSL debt ranks at the top of all U.S. consumer debt, and while improvements have been made, experts are still calling for more clarity. The CFPB and the Department of Education are currently working on a series of recommendations to present to Congress that may improve the system.
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