Report: Private-Student-Loan Market Mirrored Housing Bubble

Philadelphia Inquirer
July 20, 2012
Gelles, Jeff

Relaxed lending standards and a drive for profits helped expand the market for private student loans in the last decade, in a way that closely resembles the housing bubble, according to a report from the U.S. Department of Education and the Consumer Financial Protection Bureau (CFPB). The housing crisis was fueled in part by lenders' ability to make and then quickly resell loans, which is similar to what happened in the market for private student loans, the report notes. Also like in the mortgage market, private student loan lenders loosened standards and provided financing to more poor-credit borrowers. They also apparently targeted borrowers at for-profit institutions and charged higher rates compared to government student loans. The average loan rate among private lenders last year was about 7.8 percent; the most creditworthy borrowers could get rates between 3 percent and 4 percent, but variable rates on private loans also reached as high as 19 percent. Private educational lenders have tightened their underwriting since the financial collapse in 2008 and now work more closely with schools, require cosigners, and discourage students from borrowing beyond their needs; but their borrowers are suffering under massive debt -- $150 billion worth -- and a low rate of employment among recent graduates. Additionally, private student loans typically do not offer the accommodations, including fixed interest and flexible terms, that federal loans do when borrowers cannot repay because of financial distress.
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