Some who think they are getting a federal loan find out later that they hold a private loan. The difference can be costly.9 M; a/ Z9 |' h: d
One in a series of occasional stories6 b" S9 ^& m' O6 W. n' Y
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.
2 q) r( J8 F( pShe 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.
' b* y) B- u1 x! h. c' [3 _' B" n( G "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."2 D0 J7 L- ]4 t- d6 X. w+ E* z
Hickey got caught in an increasingly common trap in the nation’s $85-billion student loan market. She borrowed heavily, presuming that all her debt was part of the federal student loan program.
+ s7 w8 w; h2 K# E0 j) I But most of the money she borrowed was actually in private loans, the fastest-growing segment of the student loan market. Private loans have no relation to the federal loan program, with one exception: In many cases, they are offered by the same for-profit companies that provide federally funded student loans.; A# C. U: H% W9 g
As a result, some students who think they are getting a federal loan find out later that they hold a private loan. The difference can be costly.
7 P- n- d- V; I! }1 [ Whereas federally guaranteed loans have fixed interest rates, currently either 6% or 6.8%, private loans are more like credit card debt. Interest rates aren’t fixed and often run 15% or more, not counting fees.
8 B# q4 N( Q+ D6 s* U f6 L Most students have little experience in taking out loans, yet the federal government doesn’t require lenders to disclose the total cost of a student loan and other terms upfront -- before signing -- as it does for car loans and mortgages.: h+ Y6 o c* I6 `+ W" Y5 G7 N2 p
"Students are in the cross hairs, being bombarded by very sophisticated and, to some extent, ethically marginal lenders," said Rep. George Miller (D-Martinez), who sponsored legislation passed this year that will require lenders to provide more disclosures on fees. "My fear is that we are developing a predatory market, just like we have had in mortgages."
6 h* ?5 u0 b9 X# P: U: A$ F 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.. `! Q6 p- N- H) }# k
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 $31,000.1 W1 k7 h# E7 R
High-cost private loans fill that gap. One result is that students now average nearly $20,000 in debt by the time they graduate, twice as much as a decade ago. Z; y6 x* V; q6 H
"There is an alignment of interests that lead students to take out larger and larger amounts of debt," said Luke Swarthout, a former higher education advocate at the U.S. Public Interest Research Group in Washington.
0 b. J! ~- F9 m9 V% w "The students think it’s an investment in their future, and the colleges are willing to let them borrow heavily because it helps them fill in their enrollment."9 ?; J# l' q& l2 f8 F
In the dark
4 ` A a' p) S. p Hickey knew she would need loans to complete her degree, so she went to the campus financial aid office as a freshman. After she filled out paperwork, Brooks Institute set her up in a loan program administered by Sallie Mae, the nation’s biggest student lender.* }5 W+ [' f4 J4 A5 ^9 E
Sallie Mae was chartered by the federal government in 1972, and most of its business is in issuing federally insured student loans. But while it may appear to be a quasi-government agency, it is in fact a for-profit company whose stock trades on the New York Stock Exchange.$ M6 e' \' w" o5 I3 X- Z" z( b
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. |