Private Student Loans Are Potentially Evil

The New York Times has an article explaining some of the reasons that private loans are both more popular and more risky that they really ought to be.

From the NYT:

Unlike federal loans, whose interest rates are capped by law — now at 6.8 percent — these loans carry variable rates that can reach 20 percent, like credit cards. Mr. Cuomo and Congress are now investigating how lenders set those rates.

And while federal loans come with safeguards against students’ overextending themselves, private loans have no such limits. Students are piling up debts as high as $100,000.

Banks and lenders face negligible risk from allowing students to take out large sums. In the federal overhaul of the bankruptcy law in 2005, lenders won a provision that makes it virtually impossible to discharge private student loans in bankruptcy. Previously such provisions had only applied to federal loans, as a way to protect the taxpayer against defaulting by students.

While federal loans also allow borrowers myriad chances to reduce or defer payments for hardship, private loans typically do not. And many private loan agreements make it impossible for students to reduce the principal by paying extra each month unless they are paying off the entire loan.

Wow, that’s depressing.

Our advice to you high school kids out there: Do what we did. Avoid private loans and credit card debt by eating lots of cheap Snickers bars that you buy from Costco using someone else’s membership, getting a job, and going to a school named after someone who a) was once kidnapped by pirates. b) said the following: “It is our duty to prefer the service of the poor to everything else and to offer such service as quickly as possible.” This means that grant money may be available. —MEGHANN MARCO

Private Loans Deepen a Crisis in Student Debt [NYT]
(Photo: Andrew Shwegler)

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  1. hubris says:

    As someone who’s soon going to become one of those with ~100,000 in student loans, but almost no credit card debt, it’s damned hard to go to a really good school and *not* incur a lot of debt. Sure, the federal gov’t may cap your money so that you don’t overextend yourself, but that also puts an excellent education out of the reach of a lot of people. Not that state schools don’t provide a good education, but there is a difference between the rigor of different schools.

    Guess I’ll have to either become a corporate sellout and make a ton of money, or live in a van down by the river.

  2. wreckingcru says:

    What about private loans for MBA? I know that Citibank has been a popular lender for the $100K it usually costs to go to B-school – I haven’t really looked into it in depth, but taking a loan will be pretty much my only option to go to a good B-school…

    Are these also fairly predatory?

  3. Alexander says:

    That sounds awful. I went the community college/state university route and my wife took a 1 year course on dental assisting at a local community college. My dad and I paid for my college at the tune of about $15,000 for 5 years (tuition, books, etc) and my wife got a $6,000 federal grant and a $3,000 loan to not work for a year and take the program. We now make over $100,000 a year combined. I’m one of those persons that firmly believe that you get out what you put in from your education regardless of where it’s from. Yeah, I’m sure it would have been nice to go to USC or something, but at over $25,000 a year that would have been impossible for me and I would have never even considered getting private loans. Is a $100,000 education really really necessary? This of course doesn’t count if you come from money and therefore have appearances to keep up with, but for the average person I think they can do just as well with a state education than a private one.

  4. protest says:

    this stuff is really starting to freak me out! i got a private loan through sallie mae during my last year of school, it’s under 10k, and i make double payments every month online. i see the payments show up, but they don’t put your balance next to the amounts, you have to add up all the payments and subtract it from the original amount and see if it matches what they say is now due. so far it’s correct, but how is it that people aren’t able to pay down their principle by paying over?

  5. sleze69 says:

    Graduate degrees are in a different boat than undergraduate. For people who are going full time, there’s TONS of assistance available such as Teacher’s assistant scholarships (university sponsored) and Research assistant scholarships(industry sponsored). For people going one class at a time, they can often get work to reimburse them for it.

  6. Islingtonian says:

    @protest: when i log onto sallie mae, i can see my updated balance on the ‘account summary’ page when i first log in. it’s under the label ‘account information’, where it tells you what your next bill amount is and when it’s due. they list the original principal balance and the outstanding principal balance, which should update as to how much you’ve paid. mine’s a federal loan, is the private loan account page different?

    i went to college with one of the students profiled in the NYTimes article. i was lucky to get enough money from my college to cover all my expenses; i had no idea my classmates were taking out private loans! it’s a shame that students have to resort to such measures. better financial aid options exist, why aren’t they better publicized?

  7. bokononist says:

    I’ve got the 100K of loans thing going on. $1k payments/month for 30 years! woohoo!

    There is private loan consolidation, and it’s worth looking into–some of the banks offer interest rate discounts and co-borrower release after a few years of consecutive on-time payments.

  8. protest says:

    @Islingtonian:

    i wish my school worked with me more in helping me find money instead of always pushing me to get private loans. i’m classified as hispanic and my family income was below 50k and i still didn’t get enough aid to cover all my expenses. i worked through college and still had to take out a private loan to pay for rent and books. hail Pitt! colleges don’t do jack for the average student to try and keep them from incurring tremendous debt. oh well.

    yes, i can see the amounts you are referring to, it’s the payment history page that is a little shady. it shows the date and breakdown of your payments (interest vs. principle) but doesn’t show the resulting new balance for each payment like most other sites do. everything adds up, just worried because they are not a good company and i keep hearing all these truly awful stories. anyone know if citibank will buy out sallie mae loans?

  9. protest says:

    @bokononist:

    got a name for any of those banks?? i’ve been looking for a year for someone to take my sallie mae loan for less than 9%.

  10. Trai_Dep says:

    The other end of things is the astounding inflation of the cost of education. Evidently we have plenty of money to write off no-bid contracts to Haliburton, tax write offs for Paris Hilton and useless white elephants like Homeland Security/TSA, but us investing in our kids is a big freaken no-no in the past decade and a half (completely coincidentally, when the Republicans came into power).

    For example, my grad school costs leapt from $60K for the entire program (all three years) to $60K for one freaken year. In four years. That’s insane. Glad I got out when I did, before the tuition shot through the roof. But I shed a tear for my fellows every time I think about it.

  11. Trai_Dep says:

    Oops, not decade-and-a-half. Try “decade”. Typing w/o coffee = danger!

  12. Josh Smith says:

    Wells Fargo has a co borrower release but good luck getting Sallie Mae to release your loans. We have been fighting that battle for over a year now. How many times can you say, we didn’t receive the Fax.

    Also speaking from experience its not going nuts on meals and gadgets that necessitates private loans.

  13. StudentLoanWatcher says:

    The key here is “potentially evil”. Let us not forget that if used properly and responsibly, private student loans are sometimes the only way to make a college education possible. Be smart, and don’t take out a loan that you can’t afford. I would love to by a BMW M5, but you don’t see me running out to take out a $75,000 loan to buy one. Why is that? Because I can’t afford it, the same way someone who is going to work in a refuge camp shouldn’t go one of the most expensive colleges in the country. So please, take responsibility for your decisions and stop the whining.
    http://studentloanwatcher.com/another-new-york-times-stude

  14. whereismyrobot says:

    Another good way to save money is to work at the school that you are attending. I had to work full time anyway, so I just got a job at the library since my major is Library Science anyway.

    As a full-time staff member, I receive valuable experience and half off tuition.

    I know that isn’t really for everyone, but it really helped me.

  15. shdwsclan says:

    Students getting skrew3ed in a capitalist country….naw…really….

    May she should read the definition of capitalism in a textbook.

    1. Nothing is free
    2. Nobody is happy
    3. The glass is ALWAYS empty, not even half empty.
    4. Nobody is nice to you, if they are, they are nice because they want your money.
    5. Everybody is phony [ipod poser….etc], so watch out..
    6. If your going to marry in the US, or any other capitalistic country, then marry inside your nationality[if you still have one]. See 1-5 for more help.
    7. EVERYTHING has a hidden message, even commercial have a nudge/nudge, poke/poke, if your smart enough youll pick it up.
    8. If your praying to god, your wasting your time, there isnt one, not in america anyways…

    Those 8 rules will help you get through the evil called capitalism, and if your crafty…like me….you’ll even exploit it yourself and become part of the continuum.

    Thats why many foreigners that haven’t been exposed to it before go insane…like muslims/arabs, because they are very family oriented.

    Generally it takes 10-20 years on average to stabilize in america if your an immigrant, and these WILL be the WORST years of your life.

    If your gonna go to college here, a good one anyways, plan on getting here in advance like 15 years before at least….like age 5..

    Also,
    If your an immigrant, now citizen…or at least be default since your parents became so….and have followed previous rules, the best college you can go to is one thats $30,000 maximum, anything over that makes you get a title loan…..on your house….LITERALLY…

    The only way to get into a school like that is to either get a full ride, or have opened up a successful business[and this part is hard enough because greed is greater than need for education, so if your rich youll end up NOT going to school]…so really, its either full scholarship & immigrant, or rich and born here…

    O yeah…….if your a dual citizen, USE IT for god-damn sake. You can open up a foreign bank account and use your unique personal id number [kinda like an SS] and take money from there…so you get MEGA financial aid, and on some occasions, full financial aid, since there is no data linking you as an american citizen, with an SS to that UPIN in that foreign country, so you dont have to declare it. Also, in some cases you can make negative income, where you even get welfare, and your are GUARANTEED a good job, since when they run a background check, they default on you as a hobo token.

    Also, think about getting an at home job in that foeign country, with technology like vonage and the internet…you can also get financial aid for your NEGATIVE income….

  16. Islingtonian says:

    @protest: i’m hispanic and middle-class, too. and i know my family was in a similar situation to the student mentioned in the article, which is why i was surprised they had to turn to private loans. i worked through school and lived on campus so i could use my financial aid to pay for housing. granted, i had to fight my college for financial aid (at first they were only going to give me a bit in federal loans). i also got some private scholarships to help out with this and that. i think in the end the private education it was worth it, but i know the alternative (go to the highly-regarded state U) would have worked out well, too.

    i see what you mean about the sallie mae website, though. i wonder if you could consolidate your loans through another company (citibank or elsewhere). i find sallie mae’s customer service maddingly frustrating at best, but i don’t know what a better alternative there is.

  17. FatLynn says:

    The loans themselves are not evil. They are a contract between the borrower and the lender, and they are entered into voluntarily. Now, schools getting kickbacks or steering students into them when they shouldn’t is a whole other story, but don’t blame the lenders for selling a high-interest loan.

    On a side note, every student profiled in the article went to a private school. The best way to take advantage of government education dollars is to attend your friendly State U.

  18. josh1701 says:

    Many high school students and their parents, especially those families who are sending a child to college for the first time, rely on the advice from high school counselors. It’s interesting to read what they have to say about student loans.

    Below are a few of the findings from a new study, “Balancing Acts: How High-School Counselors View Risks and Opportunities of Students Loans,” that was conducted by the National Association for College Admission Counseling and the Project on Student Debt:

    –Most school counselors (78%) say that students’ and parents’ concerns
    about loan debt affect whether and where students go to college.

    –Three-fourths (76%) of counselors find it at least “somewhat hard” to
    advise students and families about how much they can afford to borrow;
    and two-thirds say it is hard to answer questions about what type
    of loan to take (66%) and what happens if borrowers cannot pay back
    their loans (64%).

    –Nearly three-quarters (74%) of high school counselors agree that students
    who are not well-prepared for college should avoid the risk of student
    loans. Slightly more (79%) say students who are well prepared can afford
    the risk of student loans.

  19. XopherMV says:

    These loans ARE evil.

    High interest rates are reserved for people with poor credit to compensate the lender in case of default, which is a greater possibility with people who have bad credit.

    However, since default is not an option, we should be seeing LOWER interest rates for everyone. We are not.

    Companies are using the old, now unconscionable interest rates under the new rules simply to increase their profits. There is absolutely no good reason to require a 20% interest rate from anyone.

    These companies have manipulated the law to benefit from society while financially crippling the people they do business with. THAT is evil.

  20. Techguy1138 says:

    All of this student loan hoopla really set somthing straight for me as a fairly recent graduate.

    I always wondered why when I asked for aid I was given stacks of loan application from the college officer as opposed to stacks of grant and scholarship applications.

    I knew some academic departments that hired people on their own to find scholarship for their students.

    Now with the kickback scandal it’s pretty obvious.

  21. usmeekly says:

    the girl in the picture on that story used to be a lot hotter when she sat in front of me in math class in high school. ah, good times…

  22. papuska says:

    I went to a public state college (not the main University in my state) over 30 years ago. I worked part-time time at the college as well, but the policy in my state still does not include tuition reduction for school employees.

    Also, taking on the challenge of college, even at a second-tier level public institution, is a whole ‘nother matter for someone like myself whose parents didn’t get beyond eighth grade. There was a lot I didn’t understand even in every day interactions with my more affluent classmates. (It didn’t help that my father died without assets. Try and explain why a mother making near minimum wage can’t help with job hunting expenses to someone who gets a car for a graduation present.)

    There were very few scholarship opportunities at the school because there weren’t any endowments. The few community groups that offered money usually required that a parent be a member of their group. The amounts available were so low they only covered say, a month or two of rent.

    I’m not complaining. I’ve managed to do ok for myself. I just wanted to say that opportunities vary for each person.

  23. zolielo says:

    @trai_dep: I was on the same path, brother. The year after I finished grad school their prices jumped 25% in one year. Yikes, on the administration’s poor management.

    @protest: I know what you mean about the lack of good data from sallie mae. I too run my own calculations. However, I have only federal loans and prefer that my loan stay out of the private market. I sure wish that an extra payment reduced the principle instead of reducing the time of the loan but those are the terms. I could payoff the loan in a single shot but for various economic reasons I do not: differenced in interest to yields of my investments, taxes, and company student loan subsidies. Those reasons will keep sallie mae my penpal for the next several years.

  24. protest says:

    @zolielo:

    that’s what i don’t get, who are your loans through that you can’t pay to your principle after satisfying interest? any arrangment other than that is just insane. sallie does appear to be taking my payments to principle after interest is paid, and this is also how my federal loans work.

    please tell me who wrote those “terms” you speak of so myself and others can avoid the place like the plague!

    and to the person who mentioned how crappy sallie mae’s customer service is: totally hear you. i’m sick of calling and everytime have to mentally translate through that friggin indian accent, and get an answer that wasn’t recited from a script.

  25. zolielo says:

    From what I recall federal education loans do not have extra payments to principle written in the contract. The terms on the contract only allow a reduction in time or paying for several structured payments in advance (i.e. pay double so that one need not pay for a month if say one is on vacation). The structure of the loan is written in that matter so that a person has an incentive to refinance the loan to a reduced payment longer time frame. A loan that is more profitable to the loan firms.

    The terms of federal education loans are decided on by Congress, the Department of Education, and loan firms. Maybe Meghann can write something up on the topic.

  26. zolielo says:

    Once one refinances and or consolidates the terms of the loan are changed so that it might be possible to have extra payments count toward a reduction in principle.

    But like I said I like the terms of my federal education loan more or less for the options and benefits it has over other loans.

  27. xredgambit says:

    yea I got one of those loans, for $12,000. This was due to the fact that I’m in a low paying job with an impending divorce, so I had to start out with nothing. And I have a lot of credit card debt. Yea I know I’m a moron, but the loan helped me off my feet and pay off my cards so now I can at least start to save some money and put off the payments on it for a little longer when I can get a good job.

  28. Secularsage says:

    I’ll never pretend to understand why people insist on going to private schools they can’t afford when there are generally good state schools that have great programs for much better prices. Considering how many people go to college just to party and/or get away from their parents and wind up dropping out within 1-3 years, you’d think word would get out about how dumb it is to take on $25,000 per year in loans you’ll have to pay back as soon as you drop out.

    I guess the people to whom it happens are too ashamed or something. I dunno.

    As a side note, I know a guy who took out over $50,000 in loans from a private lender and then stiffed them with a bankruptcy before the laws changed. What’s worse is that this was his plan from the start!

  29. protest says:

    Um, maybe some of you aren’t clear on the average cost of an average public school these days. I live and went to college in pennsylvania, where our state schools are not that great. Even when Pitt was considered mediocre 6 years ago, I still had to borrow over 10k a year because they wouldn’t give me substantial grants my first two years, and apparently my 3.5 GPA wouldn’t get me any scholarships. So even though I went to an “affordable” school I’m still up to my ears for the next 10 years.
    The system is fundementally flawed, going to a cheap school doesn’t fix anything.

  30. reykjavik says:

    getting $100,000-200,000 in debt for college is just downright stupid because college is meaningless these days. Its essentially like high school, no one is impressed and to pay 1-200 grand for it is a massive waste. Graduate school however, it may be wortwhile. For instance, going 200K in debt for law school is probably worth it because becoming a lawyer in this country, for some bizarre reason, is still impressive and really opens a lot of doors. $1500 a month in student debt loans sound like a lot, but even at $45-50 grand a year you can pay it off easy (since most student loans are tax deductable). So in my opinion it may be worth while depending on what youre student loans are really for.