Private Student Loans: The Riskiest Way to Finance College is Becoming the Last Resort for Too Many Students
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The riskiest way to finance college is becoming the last resort for too many students.
Executive Summary
Private student loans are riskier than government-issued federal student loans, yet college students continue to borrow large amounts of private loans.
Since 2005, when private student loans were declared non-dischargeable in bankruptcy proceedings, the private student loans industry has grown 50 percent. This regulatory change made issuing student loans much more lucrative and far less risky for private lenders.
In the last decade, the dollar amount of private student loans borrowed by freshmen increased 38 percent.
Studies show that private student loans are not well-understood by students, who likely confuse them with the less risky government-issued federal student loans that come with low-interest rates and flexible repayment plans, including forgiveness clauses.
For borrowers, however, high-interest rates and fees, lack of flexibility in repayment terms, and non-dischargeability in bankruptcy make private student loans especially risky.
The federal CARES Act stimulus package, passed in response to the COVID-19 crisis, offers no relief for private student debt holders and exacerbates their financial burden.
The CARES Act exclusions also expose the confusion among borrowers uncertain whether their student loans qualify for automatic suspension of payment or not.
The government must end this confusion and the serious financial struggle facing borrowers holding private debt by ensuring relief is extended to all student debt holders, regardless of loan types.
The current health crisis and its economic impacts spotlight not just how financially vulnerable student debt has made us, but also how disproportional the vulnerability has become. It is time we seriously question our heavy reliance on student loans and dare to imagine an equitable way to finance higher education.