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)