MassPIRG details risks of private student loans, debt

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

 “For many students it’s their first foray into taking out loans, so they’re just not going to be as sophisticated or educated a consumer,” Kalikow said.  “People have resources available to them that they’re not taking advantage of, and as a result, students can get trapped into these very unsafe, unfavorable risky loans.”

Lack of information is not the only reason students are taking out private loans.  Kalikow said they are falling prey to aggressive marketing practices used by banks and other lending institutions to entice students to take out private loans.             

“In the same way it’s done with credit cards, banks are marketing to students with free giveaways and lots of advertisements in areas frequented by students,” Kalikow said.  “These students are just looking to pay for college and banks are taking advantage of that.”

Unemployed or underemployed students looking to increase their job prospects are also highly susceptible to aggressive marketing for private loans.  For-profit colleges offering vocational training in fields like hair and beauty, auto repair or medical assistance advertise on billboards, daytime commercials and bus stops.

Although Kalikow says some for-profit schools fill a genuine need in the community, as a sector, they are riddled with well-document abuses, from poor instruction and low graduation rates to false advertising, high-pressure sales tactics and convictions for loan fraud.

The report finds that thousands of Massachusetts students at for-profit colleges have average higher debt levels than those at public colleges—$32,650 compared to $17,700—and the risky loans they may carry are difficult to repay if the graduate does not land a high-paying job.  

“These schools are targeting vulnerable members of the population, people who may not qualify for a traditional college and who are trying to educate themselves,” Kalikow said. “We want to make sure that group of students are being protected as well.  You can imagine what it would be like for someone to take on thousands of dollars in debt to further their education expecting to get a job and then seeing no results.”            

In one example, for-profit chain Corinthian Colleges reported to investors that it would issue $130 million in loans this year even though it expects 56 to 58 percent of the borrowers to default.

According to the report, defaulting student loans can lead to financial ruin for students, but profit for schools.  The loans increase enrollment at schools, unlocking millions in federal grant and loan dollars and buoying their stock price.

What makes these for-profit schools even more dangerous is a loophole in the House version of the CFPA bill that would exempt such institutional private loans from federal regulation.

 “MassPIRG is calling on both the House and the Senate to hold these for-profit colleges accountable to the CFPA,” Kalikow said.  “It is extremely important that they not be exempt and that they fall under the same regulation as other institutions.”

For more information on the Consumer Financial Protection Agency, visit www.ourfinancialsecurity.org.