Private Student Loans

Overview

For years, private student loans have had devastating effects on student borrowers. Many private student lenders made huge profits by collaborating with predatory for-profit schools. The government has failed to hold these lenders accountable while borrowers, particularly low-income borrowers and borrowers of color, remain buried in debt.

 

What are Private Student Loans?

Banks and other financial institutions make private student loans without any direct financial backing from the federal government. Like government loans, most private loans are supposed to be used only to pay for postsecondary education (including books, transportation, and room and board). Private student loans do not offer the same protections and benefits of federal student loans, with higher interest rates and fees and no mandatory relief options.

History of Private Student Loans

Private student lending skyrocketed during the 2000s. During this time, many lenders created predatory products designed to satisfy investors and schools, not borrowers. The lenders got away with these practices because they weren’t on the hook if student borrowers couldn’t pay. Instead, the lenders made the loans and then sold them to investors in the asset-based securitization market. The market for securitized student loans jumped 76% in 2006, to $16.6 billion, from $9.4 billion in 2005.

As the CFPB explained, “Investor demand creates incentive for quantity over quality.” Lack of quality meant loans with little or no underwriting, exorbitant interest rates, high fees, mandatory arbitration clauses and other features designed to close the door on relief for borrowers.

Quantity meant a booming private student loan market with huge profits for lenders and investors.

During the predatory lending boom, lenders pushed private loans on students who attended for-profit schools, those who were low income and students of color. For example, the percentage of African-American undergraduates who took out private loans quadrupled between 2003-04 and 2007-08, from 4% to 17%.

Graph 1

The private student loan market declined once the easy money dried up and the unsustainable predatory products predictably failed, but there is some evidence that the industry is starting to bounce back.

Graph 2

For-Profit Schools and Predatory Private Lending

Predatory student lenders and for-profit schools benefited from working together while students suffered and continue to suffer.

Most for-profit schools needed these loans. In order to comply with federal law, 10% of a for-profit school’s revenue must come from sources other than Department of Education federal financial student aid, which includes federal student loans. This is known as the “90-10” rule. For-profit schools worked with private loan lenders to make loans to students in order to make sure they could reach their non-federal 10% revenue requirement, knowing the bad outcomes that awaited students.

In order to entice private loan lenders to lend to students that they knew would eventually default on the loans, many schools and lenders entered into recourse agreements (also known as Risk Share Agreements or RSAs) on certain loans, where the school agreed to cover all or a portion of losses that result from defaulted subprime private loans provided by the private loan lender. This relationship was a win-win for the lender and for the school: the school got access to federal funding and the lenders took on very little to no risk and were eventually paid back on the loans. Meanwhile, students were left with unfordable and unenforceable debt, even when the lender was made whole.

 

Sallie Mae and Navient

Congress created Sallie Mae in 1972 to increase the supply of funds under the federal guaranteed student loan program. The company grew over time, ultimately abandoning its government sponsored status and becoming a fully private company in 2004. By 2007, Sallie Mae had a presence in nearly every aspect of government and private student lending and related businesses.

Graph 3

Source: American Institutes for Research https://newamerica.org/documents/691/leading-lady

At the peak of private student lending in the late 2000s, Sallie Mae loans accounted for about 1/3 of all private student loan originations.

Graph 4

In 2014, Sallie Mae (SLM Corp.) split into two companies: Navient and Sallie Mae. After the split, and to date, Navient and its subsidiaries are the owners and servicers of existing private loans, while also continuing to own and service federal student loans.

 

Few Options for Relief for Student Borrowers

Student borrowers with private loans from for-profit schools have very few, if any, options for relief. Most private student loans have high interest rates, no automatic forbearances or income driven plans. Students are at the mercy of their lenders to provide payment reductions or forbearances.

Student borrowers are locked into contracts with private loan lenders, often including mandatory arbitration clauses, which are unfair and favor schools.

Private student loans have many negative consequences for student borrowers. Student borrowers have ruined credit, cannot buy homes or cars, cannot get access to credit cards and cannot pursue their education further. These loans have impacted their personal lives and relationships and cause a huge amount of stress.

Although not impossible, it is difficult to get any student loans, including private loans discharged in a personal bankruptcy, where students must prove a very high bar of “undue hardship.” Despite widespread support, even from those in the industry, Congress has still not restored bankruptcy rights to student borrowers. In contrast, for-profit schools are allowed to file for bankruptcy and walk away fairly unscathed, leaving in their wake students with mounting, bogus debt and useless degrees.

The Federal Trade Commission’s “Holder Rule,” which requires all types of sellers of goods or services to include a term in their credit contracts that makes any assignee or holder of the credit contract responsible for claims or defenses that a consumer might have against the seller, is supposed to help, but in reality, is difficult to navigate. Student borrowers who try to invoke the Holder Rule, are too often met with misinformation or no response at all.  When a student borrower does get sued on private loans, they often cannot afford to hire a lawyer to represent them in court, or worse, in arbitration, to fight their case

Resources for Student Borrowers

For more information about private student loans, your rights, and local lawyers to help, visit the National Consumer Law Center’s Student Borrower Assistance website.

For more information about how to stop collectors from contacting you about private student loans, visit the Consumer Finance Protection Bureau’s website.