The Consumer Financial Protection Bureau (CFPB) and the Department of Education jointly released a report to Congress on Friday that finds that the private student loan market has exploded in recent years to $150 billion in outstanding loans, many of which are risky and come with few borrower protections.
"Subprime-style lending went to college and now students are paying the price," Education Secretary Arne Duncan said in a statement. "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."
The report found that private loans are ballooning in the student lending market, making up $150 billion of the estimated $1 trillion in student debt in America, which now exceeds Americans' total credit card debt. Much of the growth took place between 2001, when Americans took out less than $5 billion in private student loan debt, and 2008, when it expanded to over $20 billion. The bubble contracted again in 2011, when it was less than $6 billion. The amount of private loans currently in default is $8.1 billion.
During this time of growth, though, standards on loans actually loosened. Private student loans, unlike direct loans that students take out from the federal government, offer few consumer protections like flexible payment plans, options for forbearance or forgiveness, and are non-dischargeable in bankruptcy. Students often didn't understand these differences between federal and private loans and are often taking out more than they need to finance their educations. Additionally, private student lenders like giant Sallie Mae will go around financial aid offices at colleges and market these loans directly to students.
"There are striking similarities between stories of the private student loan market and stories of mortgage market in the years leading up to the financial crisis," Richard Cordray, director of the Consumer Financial Protection Bureau, told reporters Thursday. "Before the financial crisis, some lenders in both markets engaged in aggressive marketing and risky underwriting. They also originated loans for immediate sale."
Meanwhile the number of people ensnared in these loans has actually increased as the percentage of loans that have a co-signer has dramatically increased. In 2008, 67 percent of private student loans had a co-signer. In 2011, that percentage was over 90.
The CFPB and the Department of Education called on Congress to revisit a change made to bankruptcy law in 2005, which make discharging private student loan debt in bankruptcy extremely difficult.
"The realm of non-dischargeable debts is limited, and includes child support payments, alimony, debts related to tax liens, claims arising out of wrongful conduct (like a judgment against a drunk driver), and both federal and private student loans. With the exception of private student loans, these debts have one of two primary characteristics, either they are owed to the public or the creditor lacks discretion over entering into the debtor-creditor relationship (or both)," the report said.
Pro Publica recently highlighted difficulties in discharging private student loan debt when they profiled Francisco Reynoso, a father who struggled to pay off his son's student loans even after he was tragically killed in a car accident.
[Frustrated college student via Shutterstock]