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Government Report Reviews Private Student Loans and Recommends Statutory Changes

Mark Kantrowitz

July 19, 2012

Problems with Private Student Loans

The report discussed a lack of consumer protections for borrowers who are struggling to repay their private student loans.

Like federal education loans, private student loans cannot be discharged in bankruptcy except in rare circumstances. But private student loans offer fewer safety nets than federal education loans.

Private student loans lack the flexible repayment options available to borrowers of federal student loans, such as income-based repayment, extended repayment and graduated repayment. They also have inferior deferment and forbearance options. According to the report, forbearances are much less available to private student loan borrowers than in the past. In 2005 about 14% of borrowers were in a forbearance. This increased to 17% in 2007 and decreased to 3% in 2011.

Private student loans mostly offer variable interest rates, presenting borrowers with the risk that their interest rates may rise. Most variable-rate private student loans do not have a cap on the interest rate. The variable nature of the interest rates also makes the monthly loan payments less predictable.

Most private student loans do not offer death and disability discharges. However, several lenders — Sallie Mae, New York HESC, Wells Fargo and Discover Financial — have added these protections since 2009.

Private student loans do not offer borrowers the opportunity to cure a default. This is in contrast with federal education loans, which allow defaulted borrowers a one-time opportunity to rehabilitate their loans.

Private student loans do not offer loan forgiveness. Federal student loans offer several loan forgiveness programs, such as public service loan forgiveness and teacher loan forgiveness.

Borrowers often get confused about the differences between federal and private student loans. This may be less of a problem since July 1, 2010, when private lenders were no longer allowed to make new federal education loans. Previously, private lenders could offer both federal and private student loans. Nevertheless, several private lenders act as contractors in the federal Direct Loan program, servicing the federal loans throughout repayment.

Of borrowers with private student loans, 12.3% have total monthly loan payments on their federal and private education loans in excess of 15% of income. (This compares with 2.5% of all borrowers.) These borrowers will struggle to repay their loans. This group includes 23.0% of Bachelor’s degree recipients, 8.5% of Associate’s degree recipients, 5.2% of certificate recipients and 6.8% of college dropouts. (Overall, 5.0% of private student loan borrowers have monthly loan payments in excess of 25% of income, including 10.0% of Bachelor’s degree recipients.)


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