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.
“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.
