Risky lending caused private student loan debt to balloon in the past decade, leaving many Americans struggling to pay off loans that they can’t afford, a government study says.
Private lenders gave out money without considering whether borrowers would repay, then bundled and resold the loans to investors to avoid losing money when students defaulted, according to the study, which is being released July 20.
Those practices are closely associated with subprime mortgage lending, which inflated the housing bubble and helped bring about the 2008 financial crisis.
“Subprime-style lending went to college, and now students are paying the price,” said Education Secretary Arne Duncan, whose department produced the report with the Consumer Financial Protection Bureau (CFPB).
Duncan said the government must do more to ensure that people who received private loans enjoy the same protections as those who borrow from the federal government.
Student loans fall into two main categories: Loans directly from the government and those offered by banks and other private financial companies. The report focused on private student loans, which spiked from $5 billion in loans originated in 2001 to more than $20 billion in 2008.
After the financial crisis, as lending standards tightened, the market shrank to $6 billion in 2011.
American consumers still owe more than $150 billion in private student loan debt, the study said. Including federal loans, Americans now owe more than $1 trillion in student loan debt, according to the CFPB. It has surpassed credit card debt as the biggest source of unsecured debt for U.S. consumers.
Private student loans are riskier than federal loans, the study said. They often carry variable interest rates, which can cause monthly payments to rise unexpectedly. Federal loans offer fixed interest rates.
In many cases, if a borrower is unable to repay, federal loans can be postponed or reduced. Those options are rare for private loans, the study said.
Students often did not understand the difference between federal and private loans, the study said. That caused many to take out costly student loans when they were eligible for cheaper, safer government loans.