FOCUS
Private Student Loan Debt
Private loans bring total student borrowing to $1.2 trillion. Among borrowers with more than $40,000 in debt, 81 percent used private loans. Additionally, according to the CFPB’s August 2012 report to Congress on private student loans, many borrowers failed to recognize the difference between private and non-private loans, a confusion which, according to the CFPB’s report, “may cause long-lasting and substantial consumer harm.” Further, a 2003 study by the Federation of
State Public Interest Groups on higher education found that a staggering 75 percent of all private loans originated without prospective borrowers first exhausting other options (remaining federal loans available, work-study programs, outright grants or family contributions), which was reinforced in the CFPB’s Report. Tis is a significant misunderstanding of fact because private student loan debt, which grew from $1 billion in 1996 to $5 billion in 2001 to more than $20 billion in 2009 before condensing to $6 billion in 2011. Private student loans offer higher interest-rate risk, fewer repayment options and shorter default windows. It’s important to note, with 90 percent of private student loans requiring a co-signer, these loans are structured to survive the borrower’s death. Federal loans are not.
A private education loan is a student loan which is independently financed and administered by a non-federal lender. Te Federal Reserve categorizes any loan which is not a Title-IV loan as private. Aggressive marketing campaigns helped the private student loan market grow from 79 products in 1997 to 272 in 2003, an increase of 244 percent. Large financial institutions make up the majority of the private student loan debt market, often holding
18 CPAFOCUS May/June 2015
he US Consumer Financial Protection Bureau (CFPB) acknowledges federal student loan debt reached $1 trillion.
these portfolios on their books in asset accounts, without distinction, making it more difficult to accurately assess and/or contain their volatility. Te type and characteristics of student loan debt incurred by students is important when determining signers’ rights and obligations under repayment, possible consolidation and/ or discharge. While there have been significant improvements in the underwriting of private student loans over the last few years, their aggressive reach has trapped students, parents, aunts, uncles, cousins and even grandparents on social security into decades of suffocating—and perhaps unnecessary—debt. Te following is a list of their hazardous characteristics: 1. Origination Fee Risk – Federal student loan origination (processing) fees, which are normally a percentage of the loan, are deducted from loan proceeds, resulting in net payment to the borrower (or school). In contrast, private student loan agreements often capitalize origination fees, increasing principal balances, resulting in greater interest paid over the life of the loan.
2. Interest-Rate Risk – Unlike Federal loans, which offer subsidized loans (interest- free while student is in school), interest on private student loans accrue from the moment of issuance. Interest rates are determined by credit worthiness of the borrower (often creating less-favorable terms), have traditionally higher interest rates, sometimes as much as 15 percent or higher, and have variable rates tied to the market. All Federal student loans have fixed rates.
3. Limited Repayment Options Risk – Private student loans are not subject
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