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College Students ‘Subprimed’

New Briefing Paper Says College Students Need Consumer Financial Protection Agency to ‘Watchdog’ Risky Loans

WASHINGTON, Dec. 1 – Many of today’s college students face unnecessary financial risks by relying on unregulated private student loans to pay for college, with some students paying up to 18 percent interest.

That was one of just several worrying facts about today’s students noted in a new briefing paper released by the U.S. Public Interest Research Group (U.S. PIRG) and other organizations on Tuesday. The paper also stresses that more and more students are relying on private loans to pay their tuition; nearly 3 million students took out private student loans last year, up from less than one million just four years ago.  

“Students using private student loans to pay for college may as well be putting their degree on a credit card,” said Rich Williams, U.S. PIRG’s Higher Education Associate. “Like credit card debt, these private student loans carry high penalties and fees.”

The new briefing paper, Subpriming Students: Why We Need a Strong Consumer Financial Protection Agency (PDF), notes that last year, 67 percent of four-year college graduates carried debt averaging about $23,200. While most of that debt is in safe, lower-interest federal loans, a significant amount is in private loans that can carry interest rates of over 18 percent.   

Subpriming Students also supports the proposed Consumer Financial Protection Agency (CFPA), which the full House of Representatives is scheduled to vote on the week of December 9th. In addition to its many other functions, the CFPA would ensure that products like private student loans are fair and transparent.

“It is essential we have a consumer watchdog to ensure that students don’t plunge headlong into financial risk to pay for a college degree, and it is critical that private student loans are covered by the agency,” Williams noted on Tuesday.

Subpriming Students also finds that the over 2 million students attending for-profit colleges could fall prey to aggressive marketing of private loans made directly by these colleges.  Direct institutional loans increase enrollment at for-profit schools, but at a high cost to students. Unfortunately, a loophole in the House version of the bill to create the CFPA would exempt these risky institutional private loans from CFPA regulation.  This is especially worrisome given that students attending for-profit colleges have higher average debt levels than those at public colleges – $32,650 versus $17,700.

Almost any school or company can offer a high cost student loan and market it.  Lacking regulation, the products are hazardous.  Interest rates on private student loans can be three times as high as rates on federal loans, and fees can be pegged at almost 10 percent of the loan principal, Subpriming Students adds. Last year, almost 2 out of every 3 private loan borrowers did not reach the federal Stafford student loan limit before taking out a costlier private loan; 26 percent took out no Stafford loans at all.

“Students throughout the country are facing high tuition now and shaky job prospects at graduation,” Williams said. 

“Providing security to students requires strong rules for private student loan marketing, as well as terms and conditions. Only a strong Consumer Financial Protection Agency can do the job,” he concluded.

Click here to obtain a copy of Subpriming Students: Why We Need a Strong Consumer Financial Protection Agency.

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Subpriming Students: Why We Need a Strong Consumer Financial Protection Agency, was co-released by U.S. PIRG, the federation of state Public Interest Research  Groups, the United States Students Association, and Demos, a non-partisan research and advocacy organization.  Demos, United States Student Association, and U.S. PIRG are a part of Americans for Financial Reform, a national coalition campaigning for financial re-regulation.

For more on the CPFA, see U.S. PIRG’s Reining in Wall Street campaign or Americans for Financial Reform.

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