Student loan borrowers have more than $150 billion in outstanding debt through private student loans, a sector of the financial aid market beset by “risky practices” that mirrored the problems in the mortgage lending market, Obama administration officials said Thursday.
Briefing reporters on a report sent to Congress on the topic, Consumer Financial Protection Bureau (CFPB) Director Richard Cordray said the fast-growing private market bore “striking similarities” to the home loan market before the mortgage meltdown, as some lenders engaged in aggressive marketing and risky underwriting.
“Our findings reveal that students were yet another group of consumers that were hurt by the boom and bust of the financial crisis,” Cordray said. “Too many student loan borrowers are struggling to pay off private student loans that they did not understand and cannot afford.”
From 2005 to 2007, lenders increasingly marketed and disbursed loans directly to students, bypassing institutions of higher education, CFPB’s new report says. Overall, the percent of loans to undergraduates made without colleges’ involvement or certification of need increased from 40 percent to more than 70 percent.
“As a result, many students borrowed more than they needed to finance their education,” the study said. Lenders also were “more likely” during this period to give loans to students with low credit scores, thereby increasing risk.
Another tactic among private lenders was marketing to students who had not exhausted their federal Stafford Loan limits, meaning these students did not take full advantage of federal loans available to them. About 40 percent of private student loan borrowers still had federal eligibility remaining, the report said, and many students told CFPB they did not understand the differences between federal and private loans.
Originally designed to supplement federal loans to pay rising tuition, private student loans grew dramatically from just $1 billion in 2001 to $20 billion in 2008 alone as students and their families sought new ways to meet college costs. Under the Dodd-Frank consumer protection law, the federal government authorized a study to Congress on the topic.
