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MassPIRG details risks of private student loans, debt

Tierney McAfee | 12/16/2009, 2:44 a.m.

The Massachusetts Public Interest Research Group (MassPIRG) recently released a report detailing the unnecessary financial risks faced by college students who rely on unregulated private student loans to pay for school tuition.

The report, “Subpriming Massachusetts Students: Why We Need a Strong Consumer Financial Protection Agency,” found that a significant portion of Massachusetts graduates’ debt last year was in private loans that can carry interest rates of more than 18 percent and can result in damaging levels of debt.

 On average, Massachusetts’ students are graduating with $5,008 in non-federal student loans.

“The important thing to realize is that taking out a private loan is the equivalent of putting your tuition on a high-interest credit card,” said Brett Kalikow, a campus organizer at the UMass Boston chapter of MassPIRG. “Like credit cards, private student loans carry high penalties and fees. The level of debt that many students are taking on in order to support themselves through college is outrageous.”

According to the report, African Americans in particular are disproportionately more likely to take out private loans. The percentage of African American undergraduates with private loans quadrupled nationwide from 2004 to 2008.  As of 2008, 17 percent of African American undergrads have private loans, up from 4 percent in 2004.

Kalikow says the solution is creating a consumer watchdog agency to reign in abuses in the private loan market and ensure that students don’t plunge headlong into financial risk to pay for college.

Kalikow praised Congressman Barney Frank (D-MA), chairman of the House Financial Services Committee, for pushing the creation of a Consumer Financial Protection Agency (CFPA), which would regulate products that banks offer to consumers.

 “Right now there is no regulation whatsoever on the types of terms and practices that banks can use on private loans, so you end up seeing exorbitant interest rates,” Kalikow said. “What the CFPA would do is regulate the types of loans students are getting and make them much safer.  It will protect students and set standards for acceptable practices.”

            The report argues that if Congress enacts a strong CFPA, Massachusetts students will benefit from more disclosure and fairer pricing.

“Students in Massachusetts and throughout the country are facing high tuition now and shaky job prospects at graduation,” Kalikow said. “Providing strong rules for private student loan marketing and terms will provide security.”

The report also notes that students considering private loans are not aware of lower cost federal loan options.  Last year, nearly two out of every three private loan borrowers did not reach the federal Stafford student loan limit before taking out a more expensive private loan, while 26 percent took out no Stafford loans at all.  

According to the report, interest rates on private student loans can be three times as high as those on federal loans, and fees can reach almost 10 percent of the loan principal.

While the government pays interest on federally-subsidized loans until after students graduate, private lenders require students to start paying interest immediately.  

According to the report, the difference can be drastic—a UMass freshman who takes out a private loan for $1,500 at the start of the year would owe $2,945 on that loan at graduation. Taking out the same private loan for each year of study would result in a bill of $9,223 upon graduation —for just $6,000 in loans.