11.16.2009 Policy Points

Subprime Student Loans

The economic dislocations caused by the recession have led thousands of working-age adults to pursue higher education. Many students have enrolled in for-profit proprietary schools, and to afford the high tuition costs, many have turned too — or a have been steered towards — private student loans.

In the current issue of The Washington Monthly writer Stephen Burd describes the factors that sparked the surge in private borrowing and explains why this trend is harmful for working-class and low-income students. Argues Burd:

In the last decade alone, it [private loan borrowing] has grown an astounding 674 percent at colleges overall, when adjusted for inflation. The growth has been most dramatic at for-profit colleges, where the percentage of students taking out private loans jumped from 16 percent to 43 percent between 2004 and 2008, according to Department of Education data.

The spike in private loan borrowing is dismal news for students. Unlike traditional student loans, which have low, fixed interest rates, private educational loans generally have uncapped variable rates that can climb as high as 20 percent—on par with the most predatory credit cards. Private loans also come with much less flexible repayment options. Borrowers can’t defer payments if they suffer economic hardship, for instance, and the size of their payment is not tied to income, as it sometimes is in the federal program. Private loans also lack basic consumer protections available to federal loan borrowers. With a traditional federal student loan, for example, if a borrower dies or becomes permanently disabled, the debt is forgiven, meaning they or their kin are no longer responsible for paying it off. The same goes if the school unexpectedly shuts down before a student graduates. But none of this is true of private loans. Also, because it is so difficult to discharge private student loans in bankruptcy, when students take them out to attend schools that provide no meaningful training or skills they can find themselves trapped in a spiral of debt that they have little prospect of escaping.

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