Private student loan Pose Greater Risk Compared to Federal Student Loans Part 1
Consumer, student advocates worry borrowers uninformed

Such claims have led to charges that some private lenders are misleading students. Last month, the United States Student Association, an advocacy group for college students, filed a complaint with the Federal Trade Commission. The association charged that advertising by Loan to Learn, a private lender, tries to discourage borrowers from applying for federal student loans. The advertisements also suggest that the company's loans are a better alternative, the USSA argued.

"There has been a lot of confusion, and I feel students have been deceived in many different ways," says Jennifer Pae, president of the association.

Officials at EduCap, Loan to Learn's parent company, contend that the complaint mischaracterizes the materials it provides potential customers. "We encourage families to take advantage of all government financial aid programs they're eligible for before seeking assistance from lending organizations such as ourselves," says George Pappas, a senior vice president at EduCap.

Many students, though, aren't getting the message. A 2003 analysis by the Public Interest Research Groups found that nearly half of undergraduates with private loans did not first borrow the maximum available from the Stafford program. About a quarter of those students bypassed the federal loan program entirely.

Robert Shireman, director of the Project on Student Debt, says some borrowers might not understand the difference between federal and private loans, which are often provided by the same lenders.

Students may also be intimidated by the application forms for federal loans -- a fear, Shireman says, that some private lenders exploit.

Borrowers "are drawn to the easy, quick, '30 seconds and you'll be approved' type of approach we're seeing more and more of now," Shireman says.

Financial pressures on parents.

Parents of undergraduate students can supplement their children's aid and private student loan consolidation packages with a federal Parent Loan to Undergraduate Students, or PLUS loan. PLUS loans carry a fixed rate of 8.5%.

The credit standards for these loans are less stringent than those for private loans, and parents can borrow up to the full cost of college. But parents are increasingly reluctant to borrow for their children's education, lenders and financial aid directors say. Over the past decade, the amount borrowed from the PLUS program has grown at a far slower rate than the amount borrowed from private lenders.

"We're seeing a new generation of parents who want their students to take charge and be liable for their education cost," says Cebrzynski of Lake Forest College.

Parents in their 40s and 50s are "at a place in their life where they're trying to balance the desire to help their son or daughter with education and planning for retirement, and they're really torn," says Sallie Mae's Goulding. Instead, he says, they tend to co-sign a private loan taken out in a student's name.

Co-signing typically provides more favorable rates for student borrowers, but it doesn't get parents off the hook. If the borrower can't make payments, the parents who co-sign are then responsible.

John Bowie, financial aid director at the University of New England in Biddeford, Maine, points out that because current interest rates are relatively low, rates on many co-signed private loans are lower than PLUS loan rates. But he worries that some borrowers might not realize that private loans are like adjustable-rate mortgages: If interest rates rise, the rates on their loans will go up, too.

"If I were a parent, I would do a PLUS before a private loan," Bowie says.

Loans for life?

Private lenders insist the long-term benefits of a college education are worth the extra cost of a private loan. "Even if it's at a slightly higher rate, it still helps the students pull themselves up and live the life they want to live," EduCap's Pappas says.

But if borrowers are unable to find well-paying jobs, they could run into serious financial trouble. Borrowers who are unemployed or suffering economic hardship are entitled to defer payments on their federal loans for up to three years.

Private lenders aren't required to offer hardship deferments, though some do so voluntarily.

In addition, a provision included in the stricter bankruptcy law that took effect last year makes it nearly impossible for borrowers who file for Chapter 7 bankruptcy to erase private student loans. Under the law, borrowers with private loans must show "undue hardship," the same strict standard that applies to federal loans.

Borrowers must convince the court that they'll never earn enough money to repay the loan -- an unattainable standard unless the individual is permanently disabled, bankruptcy attorneys say.

Sallie Mae officials say that provision was needed to encourage lenders to offer private loans at reasonable rates.

"It's a loan being made to borrowers with no income, no near-term job prospects and no collateral," Goulding says. Giving additional bankruptcy protection to lenders, he says, "makes common sense."

Consumer groups counter that providers of private student loans don't deserve special bankruptcy protection, because there are no limits on the fees or interest rates they can charge borrowers. And because these loans lack protections included in federal loans, some borrowers could spend the rest of their lives paying off high-interest student loans, they say.

"The assumption is these people won't get stuck because college always works out financially," says Deanne Loonin, an attorney for the National Consumer Law Center. "I think that's a flawed assumption."