Recent governmental analysis has shown that about one-fourth of all federal financial aid is directed toward students who attend private, for-profit colleges, even though these students represent just 12 percent of the national college population.
Private student loans are non-federal student loans — student loans issued by banks and private lenders, rather than by the federal government.
Private student loans are credit-based loans carrying variable interest rates that can be as much as three to five times as high as the fixed interest rates on federal college loans. Additionally, private student loans don’t generally offer the flexible repayment options and borrower hardship protections offered by federal education loans.
The recent substantial drop in the amount of private student loans being issued can be partly attributed to greater publicity of the drawbacks of these loans in comparison to federal student loans.
Consumer advocates, student groups, and the U.S. Department of Education have campaigned heavily over the past three years for the benefits of low-cost federal college loans over private student loans, which the groups maintain are more expensive and higher risk for vulnerable student borrowers, many of whom are financially inexperienced and who may not be aware of exactly what kind of long-term debt burden they’re signing up for.
Private Student Loans Poised to Surge at For-Profit Colleges
The student loan default rate among students from for-profit colleges is exceptionally high because these students — a large proportion of whom are low-income, minorities, or returning students — tend to have a harder time translating their for-profit degree into gainful employment, and they’re carrying much more student loan debt than their post-graduation income will allow them to repay.
New proposed federal financial aid regulations seek to rein in what critics of for-profit colleges see as runaway student debt levels by instituting a student loan default threshold that would render a for-profit institution ineligible to offer federal financial aid to its students if its students have a sustained high student loan default rate.
A proposed federal “gainful employment” rule would also yank federal financial aid funds from for-profit schools whose students graduate with excessive debt-to-income levels and are unable, in general, to find work — “gainful employment” — that will allow them to earn enough to pay off their student loans.
But in the absence of federal financial aid, private student loans remain the financing of choice among students — particularly in the current economy, with home equity, credit card lines, investments, and college savings largely decimated — and some private lenders are readying to fill in the gaps left by the suspension of federal financial aid at ineligible institutions.
According to analysts, large private student loan lenders like Wells Fargo and Sallie Mae will reap the benefits of the proposed federal financial aid sanctions, which are set to go into effect in 2012.