Private Loans

At a time of staggering growth in risky private borrowing to pay for college, and rising suspicions of questionable marketing practices by private loan companies, the U.S. Department of Education has yet to publish some of the most relevant data on private borrowing. Why?

Higher Ed Watch has obtained an unpublished Department working paper documenting disturbing patterns in private loan use by undergraduates. We think it's important enough data that we're republishing this post from the fall with slight revisions out of fear that it might have been lost amidst attention to the November 2006 election results.

The Department's data indicates that students are taking out expensive private loans instead of much cheaper and safer federal loans. And its not just the rich kids.

Even though they have untapped low-interest rate, federal student loan eligibility, middle class and low-income students are taking out high interest, private loans. Loan to Learns private loans, for example, have interest rates that reach up to 16% a year on top of a 10% up front fee as opposed to unsubsidized federal Stafford student loans that have interest rates of 6.8% a year and federal PLUS loans that have interest rates of 8.5% per year.

A graphic from the Department's unpublished paper shows that private borrowing is highest among students from high family income brackets, for whom college costs tend to be more and the federal loan subsidy and federal student aid less. That makes sense. High income students disproportionately attend high cost private institutions and aren't eligible for need-based financial aid. But surprisingly, middle income and poor students also are taking out private loans even if they haven't exhausted their lower cost federal loan eligibility.

Even more interesting is a look at the data broken down by race. Among African American students, those in the highest income brackets have the lowest amount of private borrowing, while those in the middle income brackets have the highest level of private loan borrowing. And the lowest-income black students are taking out more private loans than the highest-income students. Why the racial disparity when compared to overall figures?

We shudder to think that the lower-income African American population has been targeted for private loans or that barriers exist to block them from lower interest rate, federally subsidized student loans. Those are two possible explanations among many. We would like the Department of Education to make the data widely available and offer its explanation.

One thing is for certain. Private borrowing has exploded and in many cases is victimizing the populations that student aid programs are supposed to help.

When Congress reauthorizes the Higher Education Act this Spring, it shouldn't sidestep the private student loan explosion. It should, with the Department of Education's cooperation and advice, not to mention that of the higher education community, address the growth in high interest, private student loan borrowing head on.

We'll offer our own modest suggestions as to how in the coming days. Stay tuned.