Report compares private student loans to subprime mortgage crisis

http://www.dailycal.org/2012/07/30/private-student-loans-challenged-as-the-new-subprime/

A recently published report from the federal government highlighted trends in student borrowing from private lenders that included significant variability during the years of economic growth and recession, drawing comparisons to the subprime mortgage crisis.

The findings of the report, published by the Consumer Financial Protection Bureau, included that student borrowing from private lenders “rapidly grew” from $5 billion in 2001 to $20 billion in 2008, followed by a “precipitous” decline to less than $6 billion in 2011.

Private lenders, the report states, “loosened” their approval standards during the period of national economic growth when private borrowing increased. The percentage of private loans made without approval from the students’ schools increased from 40 percent to 70 percent between 2005 and 2007. During that same period, private lenders were more likely to lend to students with lower credit scores. These changes, according to the report, “made private student loans riskier for consumers.”

Shortly after the beginning of the recession, in 2008, defaults on student loans rose dramatically. Today, 850,000 student loans have defaulted, representing a cumulative $8 billion. Although the report acknowledged that an increase in defaults may be part of the recession, it also said these defaults may be related to “over-borrowing and the level of subprime credits in cohorts like 2007.”

Even though comparisons were drawn to a mortgage crisis that had international economic implications, officials from the Bureau focused on the impact of the lending on students.

“The impact of the economy is that many are facing high debt burdens. Many say that is preventing them from saving up for a home and other economic milestones,” said Rohit Chopra, student loan ombudsman at the Bureau.

A relatively small amount of students — 14 percent undergraduate and 11 percent graduate — take out private loans to finance their education. Most draw first from the over $97 billion in subsidized and unsubsidized loans offered by the federal government every year, according to a report by the College Board. Federal loans offer special protections for students including subsidized and fixed-interest rates, deferment options, forbearance and income-based repayment. Some have said that students are not aware of these special protections offered by these loans.