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Megan
Connors of Harford County, Md., says she got a great
education at Auburn University but a brutal lesson on
private student loans.
Federal
aid wasn’t enough to cover four years at the Alabama
school, so Connors made up the difference with private
loans. Now, four years after graduation and working at a
job far afield from her major, the prekindergarten
teacher struggles to repay about $101,000 in private
loans.
“If I
knew I would be in this much debt, I probably wouldn’t
have pursued a four-year degree,” said the
30-year-old, whose retired parents help with the loan
payments.
Granted,
Connors’ case is unusual. But it’s a dramatic
example of how some young adults have relied on private
education loans to fulfill a college dream, not
realizing the long-term financial consequences to
themselves and the family members who co-sign. It’s an
issue that has long concerned student advocates — and
now Congress.
The
Dodd-Frank law requires the Education Department and the
new Consumer Financial Protection Bureau to report on
private education loans by July. As part of that, the
consumer bureau recently announced it was seeking
answers from students, schools and lenders to a series
of questions.
Among
them: Where do families learn about private loans? Why
do students take out these loans before making full use
of federal aid? Do private lenders provide adequate
disclosures? And how does debt affect a new graduate’s
career choice?
“The
private student loan market is one of the
least-understood consumer credit markets,” Raj Date,
the bureau’s acting leader, said in a statement. “It
has been operating in the shadows for too long.”
Agreed.
It’s about time we have a national discussion not only
about private loans, but about paying for college and
whether we are preparing teens well enough to make these
big financial decisions that will affect them long into
their future.
In
Connors’ case, her debt has affected her career. She
studied criminology at Auburn but hasn’t found work
with the federal government, which checks credit reports
for security positions.
“When
they find out about your student loan debt and how much
you owe, they don’t want to take a chance on you,”
she said. Interviewers, she said, have told her that she
is “too much of a risk.”
Private
loans aren’t closely tracked like federal aid, so
it’s difficult to know the extent of borrowing and the
impact on young adults.
A recent
study by the Project on Student Debt found that about
one out of seven undergraduates took out a private loan
for the 2007-2008 academic year, the most recent figures
voluntarily reported by schools. The majority of
students resorted to private loans before fully taking
advantage of federal loans. Worse, some didn’t even
bother with federal loans.
“It’s
much like taking out a subprime mortgage when you are
eligible for a prime mortgage,” said Pauline
Abernathy, vice president with the Institute for College
Access & Success, a nonprofit policy group.
Federal
loans are far more consumer-friendly and should be a
family’s first choice if there is a need to borrow.
Government
loans carry a fixed interest rate, while private loans
have a variable rate that can go up and increase
students’ payments. And Uncle Sam offers loan
forgiveness, deferments for the unemployed and an
income-based repayment plan that can sharply reduce
payments if income is too low to manage the debt.
So why do
students turn to private loans?
Sometimes
they don’t understand the difference between the two
types of loans, experts say, or families with strong
credit are able to get a lower interest rate with a
private loan.
“A lot
of it is advertising,” said Mark Kantrowitz, publisher
of FinAid.org, an online provider of aid information.
For
instance, if you search for student loans on Google, all
sorts of ads pop up promising “fast” or “no
co-signer” private loans.
“The
first thing a student hears about,” Kantrowitz said,
“is going to be the private loans.”
But there
is also the misconception that families earn too much to
qualify for federal assistance, Abernathy said. Sure,
only those in need receive subsidized federal loans, on
which the government pays the interest while students
are in school. But all dependent undergraduates — even
the offspring of millionaires — can borrow a total of
$31,000 in unsubsidized loans. The government won’t
pick up the interest, but the loans carry the same
borrower protections.
But all
this isn’t made clear to families, particularly to
teenagers who are expected to make these huge financial
decisions.
Cheri
Parrag, the first in her immediate family to go to
college, said she didn’t understand financial aid when
she was accepted at her dream school, New York
University, in 2000.
Her
parents had filed for bankruptcy, so they didn’t
qualify for a federal parent loan. And the federal aid
and school scholarship she did receive wasn’t enough
to cover the cost of attendance. She said NYU advised
her to take out private loans. Her grandmother co-signed
some of them.
Parrag,
now 29 and living in Florida, said she loved her
experience at NYU, but it came at a steep price. She
graduated with $30,000 in federal loan debt, plus
$105,000 in private loans.
Her
initial loan payments totaled $1,500 a month, which ate
up three-quarters of her temp job income. She moved in
with her father to save money.
Parrag
now works as a marketing coordinator making $48,000 a
year, but she said her loans and other expenses make it
tough to set aside money for emergencies. She and her
husband have postponed having children because of
finances.
She said
she wishes her high school and NYU had better counseling
services. For instance, she said, no one at NYU told her
she could borrow more from the federal government
because her parents were denied a federal loan. “They
told me my only option left was private loans,” she
said.
NYU
spokesman John Beckman said he can’t comment on
Parrag’s situation because of privacy laws. But he
wrote in an email: “Our financial aid advisers are not
financial planners, but they provide families with
information to help them understand the financial
implications of attendance.”
Justin
Draeger, president of the National Association of
Student Financial Aid Administrators, said schools have
a responsibility to help students understand the terms
and conditions of all loans. But sometimes schools
aren’t aware of all student borrowing.
Schools
now must certify federal loans, meaning they determine
how much students are eligible to borrow. But there’s
no such requirement with private loans, Draeger said, so
aid officers don’t always know upfront if students are
overextending themselves or need additional counseling.
Draeger
said his group will advise the consumer bureau to
require that private loans be certified by schools to
prevent overborrowing. This also has the support of
student advocates and loan giant Sallie Mae, which
already asks schools to certify its private loans.
If you
have ideas to improve the system or want to share your
story, the consumer bureau is accepting input until
mid-January. You can reach it by email at CFPB(UNDERSCORE)StudentsFedReg@cfpb.gov.
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