Once again, student-loan season is upon us. As a new class of freshmen ships off for a hopeful first year of college or trade school, many are as busy figuring out financial arrangements as lining up classes. It wasn’t always this way, but as education has become both more costly and more necessary, many students feel they don’t have any other choice. And so they borrow $10,000, $25,000, as much as $100,000, often unaware of the unforgiving nature of the debt they’re taking on.
This year, as these students prepare to sign away their futures, they would do well to consider a report released by the Consumer Financial Protection Bureau (CFPB). On July 20, the agency designed by Massachusetts Senate candidate Elizabeth Warren released “Private Student Loans,” a devastating expose of the $150 billion private student loan industry, one of the banking world’s Goliaths. The report is both an official account of private lenders’ underhanded “subprime-style” tactics as well as a sharp warning against taking out private loans that put students at risk of financial ruin.
As described in the report, the student-loan industry is a villainous enterprise, set on scamming some of the country’s most eager and vulnerable citizens. Anchored by lending giants like Sallie Mae and bolstered by some for-profit colleges that lend to their own students, it bears all the hallmarks of some of the last decade’s other most predatory industries. Much like the mortgage industry, it used cheap-credit tactics to prey on low-information borrowers, typically students of color, effectively quadrupling in size between 2001 and 2008. And like the mortgage industry, it collapsed in the recession, leaving many students drowning in debt. Today, more than $8.1 billion worth of private student loans are in default.
Here’s one way the industry goes about its business: though private student loans typically come to students through a menu of lending options from a college or university’s financial aid office, along with federal options like Pell grants and subsidized Stafford loans, the CFPB report explains that many of these loans are offered directly to students without input from a financial aid office. This tactic, called “direct to consumer” lending, results in “significant over-borrowing.” This is problematic because “over-borrowing increases the likelihood of default, to the detriment of both borrower and lender.”
And the scam gets worse. Though an estimated two-thirds of private student-loan borrowers don’t understand the difference between private and federal loans, there is at least one critical difference: private student loans lack key protections that come with federal student loans—most notably, a variety of options for delaying or reducing payments if students encounter economic hardship.
“That confusion has been deliberate,” said Lauren Asher, president of the Institute for College Access and Success. “People get stuck with these loans, often without clear information.”