Some who think they are getting a federal loan find out later that they hold a private loan. The difference can be costly.) Z* K- i3 X$ {, }# O+ |
One in a series of occasional stories
3 s) V! Y# s9 T1 C Natalie Hickey left her small hometown in Ohio six years ago and aimed her beat-up Dodge Intrepid for the West Coast. Four years later, she realized a long-held dream and graduated with a bachelor’s degree in photography from Brooks Institute in Santa Barbara.1 k' T. O, F/ u* A4 b
She also picked up $140,000 in student debt, some of it at interest rates as high as 18%. Her monthly payments are roughly $1,700, more than her rent and car payment combined.
5 Q& r! P$ F. [7 _; J6 U% | "I don’t have all this debt because I was buying stuff," said Hickey, who now lives in Texas. "I was just trying to pay tuition, living on ramen noodles and doing everything as cheaply as I could."0 W) U9 A3 D1 K. e- s6 S
Hickey got caught in an increasingly common trap in the nation’s $85-billion student loan market. She borrowed heavily, presuming that all her debt was part of the federal student loan program.
# E- n: e+ t B. c But most of the money she borrowed was actually in private loans, the fastest-growing segment of the student loan market. Private loans have no relation to the federal loan program, with one exception: In many cases, they are offered by the same for-profit companies that provide federally funded student loans.
/ i" p3 T4 i; z. s9 [8 t: i As a result, some students who think they are getting a federal loan find out later that they hold a private loan. The difference can be costly.- h: S/ \* F, g1 f/ I# {
Whereas federally guaranteed loans have fixed interest rates, currently either 6% or 6.8%, private loans are more like credit card debt. Interest rates aren’t fixed and often run 15% or more, not counting fees.7 g6 t* H9 u! Q
Most students have little experience in taking out loans, yet the federal government doesn’t require lenders to disclose the total cost of a student loan and other terms upfront -- before signing -- as it does for car loans and mortgages.
. m/ k4 K$ k- F3 h5 {3 |# m "Students are in the cross hairs, being bombarded by very sophisticated and, to some extent, ethically marginal lenders," said Rep. George Miller (D-Martinez), who sponsored legislation passed this year that will require lenders to provide more disclosures on fees. "My fear is that we are developing a predatory market, just like we have had in mortgages."
4 c$ x3 @5 I/ b; V( [3 W About $15 billion in private student loans are expected to be funded this year, a 900% increase from a decade ago, according to the nonprofit College Board. Private loans are growing faster than federally guaranteed loans, which rose 59% over the same period, in part because of limits on how much students can borrow with the government’s backing.
- b" A( q, C! ~3 D/ y0 F# Z Four years at a public university, including room and board, costs an average of $57,332, according to the College Board. The average tab for a private university is $136,528. Yet the maximum that can be borrowed under the federal loan program is $31,000." }% n! ^7 P0 I& p
High-cost private loans fill that gap. One result is that students now average nearly $20,000 in debt by the time they graduate, twice as much as a decade ago.
7 H/ c% h7 g& N4 \; L "There is an alignment of interests that lead students to take out larger and larger amounts of debt," said Luke Swarthout, a former higher education advocate at the U.S. Public Interest Research Group in Washington.$ c6 p: y% ^% y v) e
"The students think it’s an investment in their future, and the colleges are willing to let them borrow heavily because it helps them fill in their enrollment."7 w+ o0 U' U" a: Y9 h% o' @; |
In the dark
% I! A3 I/ _5 @ M0 F* E: K Hickey knew she would need loans to complete her degree, so she went to the campus financial aid office as a freshman. After she filled out paperwork, Brooks Institute set her up in a loan program administered by Sallie Mae, the nation’s biggest student lender.$ T# U# l) V1 c+ c( C. t
Sallie Mae was chartered by the federal government in 1972, and most of its business is in issuing federally insured student loans. But while it may appear to be a quasi-government agency, it is in fact a for-profit company whose stock trades on the New York Stock Exchange.- m# U. p+ y# |9 N; O! H
Hickey ended up with $20,000 in low-interest federally guaranteed loans issued by Sallie Mae, and $120,000 in higher-interest private loans issued by Sallie Mae. |