Lenders force more students to rely on private loans

By Sarah Pastor
September 20, 2007

Ask a typical college student when their next physics test is or how many weeks are left until finals and you can expect an answer in less than five seconds. But when questioned on the total amount or interest rate of their student loans, even the brightest students are often stumped.Unfortunately, recent restrictions by the Federal Education Department on payment regulations for university lenders are forcing more and more students to rely on private loans that can carry interest rates up to five times that of a university loan. And with college tuition rising steadily every year, the majority of college students find it necessary to take on private loans that can leave them over $100,000 in debt upon graduation.

But as a high school graduate with no other source of college funding, relying on a private lender to foot the yearly bills seems like the perfect solution. Although expected to increase slightly beginning next month, most federal loans have a limit of $17,125 for up to four years. And as thousands of college-bound students and their families know, the expenses of a college education, plus books, lab and computer fees, room and board and all of the other miscellaneous costs far exceed this government grant. Parents who want their children to receive a college education but are unable to afford the financial undertaking often have the option but turn to private lenders.

The huge amount of profit associated with student loans is no secret to private lenders across the country. According to a report by the College Board, private student loans have more than tripled their revenues in the past five years, reaching over $17.3 billion in the 2005-06 school year. They are quickly becoming one of the fastest growing divisions in the student finance market. As tuition prices continue to rise, experts foresee this monopoly increase accordingly.

A recent complaint filed by the United States Student Association to the FTC, the “false and deceptive [advertising] claims” used by many lenders to further market their services only add to the problem. In fact, the assurance by private lenders of a debt free college education until graduation, including all of the hidden costs associated with it, is sometimes so misleading that some students are using unregulated private loans before using all of the fixed rate, low interest government aid they are eligible for private lenders have been accused of using false accusations towards government sponsored financial aid to persuade students to turn directly towards for- profit private loan organizations for college aid. Unknowing college hopefuls are lured toward lenders that reserve the right to change interest rates freely until the loans are paid off. Sadly, many students approach graduation in more debt then if they would have paid the difference in college tuition after government loans personally.

The prospect of being able to attend a four year college is often so alluring that many kids don’t think twice about signing their lives away in private, unregulated student loans. The excitement of moving away from home, starting new classes and beginning the next chapter in life make it all too easy to overlook the mounting debt that will be accumulating over the next four years. Students are so preoccupied in the college lifestyle that many forget the debt they are amassing entirely and spend extra cash recreationally instead of saving to pay off student loans. For kids who aren’t even old enough to be considered legal adults, four years of schooling without debt seems like an eternity. Only by looking beyond the near future can students begin to realize the consequences of private loans and sign with private lenders cautiously.

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Sarah Pastor

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