Imagine if you had to pay 18 percent interest today on a mortgage or auto loan. Absurd, you’d say, when the prime rate has hovered at 3.25 percent for years. But some students who seek loans in the private market have to pay such exorbitant rates, which is why relying on the private sector for student loans is a dangerous idea.
Few deny that we face a student loan crisis in America. Student loan debt has doubled over the past seven years and is now close to $1.3 trillion. About 40 million Americans have an average debt exceeding $27,000, and some end up paying back loans well into their 30s, 40s and even 50s. Student loan debt now surpasses debt on credit cards, auto loans and home equity lines of credit.
As debt levels increase, young people are forced to delay starting a family, purchasing a home, starting a small business and saving for retirement. This not only affects their lives, it impacts the overall economy.
At a recent hearing of the Joint Economic Committee, some Republicans argued that to get us out of this mess we should shrink access to federal loan programs and expand the private loan market. It’s a dangerous approach that could reduce access to college and expose students to new financial risks.
Private student loans typically carry higher interest rates, sometimes more than four times higher than federal loans. They lack many of the consumer protections that federal loans provide, which are especially critical during difficult economic times. Options such as income-based repayment and extended loan terms—standard with federal student loans—usually are not available with private student loans.
There’s a long history of predatory practices with private student loans that includes inflating billing statements, deceiving borrowers to maximize late fees and illegally calling borrowers early in the morning and late at night. Last year, the Department of Justice ordered Sallie Mae and Navient to pay $60 million for charging excess interest on the student loans of tens of thousands of service members.
At the JEC hearing, Rohit Chopra, the former student loan ombudsman at the Consumer Financial Protection Bureau who fought against these and other abuses, noted: “Lenders sidestepped schools and aggressively targeted families without clearly explaining that private student loans don’t include some of the key protections of federal student loans.”
Republicans argue that federal loans are too easy to get and that the easy money allows colleges to raise their prices. But they omit that private lenders are doing a full-court press to sell their loans—targeting students aggressively on campus, off campus, in gyms, on Pandora, wherever they can find them.
A new alternative called “income share agreements” bears the same risks. With ISAs, a student would obtain funding for their college education from a private company. But instead of paying that amount back plus a fixed rate of interest, he or she would commit a percentage of their future income for a fixed number of years.
The lenders score when they invest in the next Mark Zuckerberg, CEO of Facebook, and by avoiding lending to students who may be pursuing lower-paying but important fields like teaching, history and social work.
Looking for private solutions to the student debt crisis ignores one of the biggest causes of the problem: States have slashed their support for higher education, and this trend only accelerated following the Bush-era recession.
State governments and families hit hard by the recession now have fewer resources to commit to education. With states investing almost one-fourth less in public universities from 2003 to 2012, universities have had to charge more. With family savings depleted, students have to borrow more. The average debt of a bachelor’s degree recipient at a public four-year institution has climbed from $21,900 in 2006-07 to $25,600 in 2012-13.
And there’s another piece of the story. While tuition at private colleges hasn’t increased as rapidly as at public institutions, private colleges remain more than three times as expensive as public colleges. With average tuition of over $31,000 a year, these schools are priced out of reach for all but the wealthiest students, requiring most students to take on huge debt loads to finance their educations. New initiatives such as the College Scorecard, which empowers students to compare crucial information like tuition costs and earning potential of various majors, offer promise. But even bolder action is needed.
The answer to the student debt crisis is not to restrict the availability of federal student loans or to increase the market share of private lenders offering significantly higher interest rates and fewer consumer protections. The answer is to strengthen our public commitment to higher education—making tuition free at community colleges, increasing investments in Pell Grants and partnering with the states to ensure that a college education is accessible to anyone who wants it.
