Americans have racked up a whopping $150 billion in private student loan debt, a sum many are struggling to repay, according to a recent report released by the U.S. Department of Education and the Consumer Financial Protection Bureau.
"Too many student loan borrowers are struggling to pay off private student loans that they did not understand and cannot afford,” Richard Cordray, director of CFPB, said in a statement.
The $150 billion is just a small chunk of the $1 trillion total student debt in the U.S. — but there are hefty risks and consequences associated with these private loans. Private loans are different from federal ones in that they do not have fixed interest rates and often have fewer protections for borrowers who are struggling to pay.
The report explains that during the last decade, private loans grew significantly during the boom and then dropped dramatically in the financial crisis. During the growth period, restrictions were looser, meaning that lower minimum credit scores were needed to acquire a loan and lenders could circumvent schools to sign up needy students. Many students ended up borrowing more than they needed to, despite the fact that they couldn’t afford it. This lead to more defaults on loans over the last four years.
The confusion over differences between federal versus private loans did not help either, as many students didn’t realize they still had federal loan options before they turned to private loans. Federal loans are more popular, accounting for $864 billion of the $1 trillion debt mountain. One difference is federal loans have a fixed interest rate, while private loans are often variable. This can sometimes cause debt payments to balloon unexpectedly.
“We still have some work to do to ensure that students who take out private student loans have the same kinds of protections offered by federal loans,” U.S. Secretary of Education Arne Duncan said in a statement. “In the meantime, if you have to take out a loan to pay for college, federal student aid should be your first option.”
Lending practices for private loans have tightened since 2008, including requiring a co-signer and school approval for the loan in most cases. However, many recent grads are still saddled with debt that is difficult to repay.
“Moving forward, we must do our best to leave the next generation in a better place than we are today, rather than buried under a mountain of debt," Cordray said.
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