By Eileen Ambrose, The Baltimore Sun
December 4, 2011
Megan Connors of Harford County says she got a great education at Auburn University but a brutal lesson on private student loans.
Federal aid wasn't enough to cover four years at the Alabama school, so Connors made up the difference with private loans. Now, four years after graduation and working at a job far afield from her major, the prekindergarten teacher struggles to repay about $101,000 in private loans.
"If I knew I would be in this much debt, I probably wouldn't have pursued a four-year degree," says the 30-year-old, whose retired parents help with the loan payments.
Granted, Connors' case is unusual. But it's a dramatic example of how some young adults have relied on private education loans to fulfill a college dream, not realizing the long-term financial consequences to themselves and the family members who co-sign. It's an issue that has long concerned student advocates — and now Congress.
The Dodd-Frank law requires the Education Department and the new Consumer Financial Protection Bureau to report on private education loans by July. As part of that, the consumer bureau recently announced it was seeking answers from students, schools and lenders to a series of questions.
Among them: Where do families learn about private loans? Why do students take out these loans before making full use of federal aid? Do private lenders provide adequate disclosures? And how does debt affect a new graduate's career choice?
"The private student loan market is one of the least-understood consumer credit markets," Raj Date, the bureau's acting leader, said in a statement. "It has been operating in the shadows for too long."
Agreed. It's about time we have a national discussion not only about private loans but paying for college and whether we are preparing teens well enough to make these big financial decisions that will affect them long into their future.
In Connors' case, her debt has affected her career. She studied criminology at Auburn but hasn't found work with the federal government, which checks credit reports for security positions.
"When they find out about your student loan debt and how much you owe, they don't want to take a chance on you," she says. Interviewers, she says, have told her that she is "too much of a risk."
Private loans aren't closely tracked like federal aid, so it's difficult to know the extent of borrowing and the impact on young adults.
A recent study by the Project on Student Debt found that about one out of seven undergraduates took out a private loan for the 2007-2008 academic year, the most recent figures voluntarily reported by schools. The majority of students resorted to private loans before fully taking advantage of federal loans. Worse, some didn't even bother with federal loans.
"It's much like taking out a subprime mortgage when you are eligible for a prime mortgage," says Pauline Abernathy, vice president with the Institute for College Access & Success, a nonprofit policy group.
Federal loans are far more consumer-friendly and should be a family's first choice if there is a need to borrow.
Government loans carry a fixed interest rate, while private loans have a variable rate that can go up and increase students' payments. And Uncle Sam offers loan forgiveness, deferments for the unemployed and an Income-Based Repayment Plan that can sharply reduce payments if income is too low to manage the debt.
So why do students turn to private loans?
Sometimes they don't understand the difference between the two types of loans, experts say, or families with strong credit are able to get a lower interest rate with a private loan.
"A lot of it is advertising," says Mark Kantrowitz, publisher of FinAid.org, an online provider of aid information.
For instance, if you search for student loans on Google, all sorts of ads pop up promising "fast" or "no co-signer" private loans.
"The first thing a student hears about," Kantrowitz says, "is going to be the private loans."
But there is also the misconception that families earn too much to qualify for federal assistance, Abernathy says. Sure, only those in need receive subsidized federal loans, in which the government pays the interest while students are in school. But all dependent undergraduates — even the offspring of millionaires — can borrow a total of $31,000 in unsubsidized loans. The government won't pick up the interest, but the loans carry the same borrower protections.
But all this isn't made clear to families, particularly to teenagers who are expected to make these huge financial decisions.
Cheri Parrag, the first in her immediate family to go to college, says she didn't understand financial aid when she was accepted at her dream school, New York University, in 2000.
Her parents had filed for bankruptcy, so they didn't qualify for a federal parent loan. And the federal aid and school scholarship she did receive wasn't enough to cover the cost of attendance. She says NYU advised her to take out private loans. Her grandmother co-signed some of them.
Parrag, now 29 and living in Florida, says she loved her experience at NYU, but it came at a steep price. She graduated with $30,000 in federal loan debt, plus $105,000 in private loans.
Her initial loan payments totaled $1,500 a month, which ate up three-quarters of her temp job income. She moved in with her father to save money.
Parrag now works as a marketing coordinator making $48,000 a year, but she says her loans and other expenses make it tough to set aside money for emergencies. She adds that she and her husband have postponed having children because of finances.
She says she wishes her high school and NYU had better counseling services. For instance, she says, no one at NYU told her she could borrow more from the federal government because her parents were denied a federal loan. "They told me my only option left was private loans," she says.
NYU spokesman John Beckman says he can't comment on Parrag's situation because of privacy laws. But he wrote in an email: "Our financial aid advisers are not financial planners, but they provide families with information to help them understand the financial implications of attendance."
Justin Draeger, president of the National Association of Student Financial Aid Administrators, says schools have a responsibility to help students understand the terms and conditions of all loans. But sometimes schools aren't aware of all student borrowing.
Schools now must certify federal loans, meaning they determine how much students are eligible to borrow. But there's no such requirement with private loans, Draeger says, so aid officers don't always know upfront if students are overextending themselves or need additional counseling.
Draeger says his group will advise the consumer bureau to require that private loans be certified by schools to prevent overborrowing. This also has the support of student advocates and loan giant Sallie Mae, which already asks schools to certify its private loans.
If you have ideas to improve the system or want to share your story, the consumer bureau is accepting input until mid-January. You can reach it by email at CFPB_StudentsFedReg@cfpb.gov.
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