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CFPB Report Highlights Private Student Loan Pitfalls

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Millions of Americans have some amount of student loans in their names these days, and these debts can cause considerable problems.

The private student loan market has expanded significantly in the past decade, both as a result of increasing tuitions at colleges and universities around the country, and the economic downturn forcing many consumers to seek alternative ways to fund their educations, according to a new report from the Consumer Financial Protection Bureau. And during that time, private lenders have significantly broadened the credit qualifications needed to get a student loan, which in turn has led to many struggling to pay their bills every month.

The private student loan market accounted for less than $5 billion annually in 2001, but that number rose to more than $20 billion in 2008, the report said. However, it has also slipped back to just $6 billion in 2011. This change might have been the result of lenders marketing and giving loans directly to students, rather than involving institutions of higher learning in the process – increasing the share of credit extended directly to borrowers to more than 70 percent from just 40 percent between 2005 and 2007. That, in turn, led many to borrow more than they needed.

“Subprime-style lending went to college and now students are paying the price,” said U.S. Education Secretary Arne Duncan in a press release on the study. “We still have some work to do to ensure that students who take out private student loans have the same kinds of protections offered by federal loans. In the meantime, if you have to take out a loan to pay for college, federal student aid should be your first option.”

Part of the problem is that borrowers don’t understand the difference between federal student loans and those from private lenders, the report said. Many of the borrowers who sought the latter type of financing did so before fully exhausting their options with the former, and a large number also reported that they didn’t know they were allowed fewer repayment options on private financing.

As a consequence of the lack of awareness and marketing more often to subprime borrowers, many ran into significant difficulties meeting their obligations every month, the report said. Default rates on these loans have actually grown since the end of the financial crisis, particularly as the unemployment rate for private student loan borrowers in 2009 hovered around 16 percent. In all, 10 percent of graduates with four-year degrees owe more than 25 percent of their monthly income on these bills.

Image: jayewalking, via Flickr

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