Private student loan (United States)

The increase in use of private student loans came about around 2001 once the increase in the cost of education began to exceed the increase in the amount of federal student aid available.

The recent history of student loans has been compared to the history of the mortgage industry. Similar to the way in which mortgages were securitized and sold off by lenders to investors, student loans were also sold off to investors, thereby eliminating the risk of loss for the actual lender.

Another parallel between the student loan industry and the mortgage industry is the fact that subprime lending has run rampant over the past few years. Just as little documentation was needed to take out a subprime mortgage loan, even less was needed to take out a subprime or "non-traditional" student loan.

After the passage of the bankruptcy reform bill of 2005, even private student loans are not discharged during bankruptcy. This provided a credit-risk-free loan for the lender, averaging 7 percent a year.[3]

In 2007, the then-Attorney General of New York State, Andrew Cuomo, led an investigation into lending practices and anti-competitive relationships between student lenders and universities. Specifically, many universities steered student borrowers to "preferred lenders" which resulted in those borrowers incurring higher interest rates. Some of these "preferred lenders" allegedly rewarded university financial aid staff with "kickbacks." This has led to changes in lending policy at many major American universities. Many universities have also rebated millions of dollars in fees back to affected borrowers.[4][5]

The biggest lenders, Sallie Mae and Nelnet, are criticized by borrowers. They frequently find themselves embroiled in lawsuits, the most serious of which was filed in 2007. The False Claims Suit was filed on behalf of the federal government by former Department of Education researcher, Dr. Jon Oberg, against Sallie Mae, Nelnet, and other lenders. Oberg argued that the lenders overcharged the U.S. Government and defrauded taxpayers of millions of dollars. In August 2010, Nelnet settled the lawsuit and paid $55 million.[6]

Prior to 2009, most private student loans did not offer death and disability discharges. After the Boston Globe published an article critical of Sallie Mae's failure to discharge the private student loans of a Marine killed in action, Sallie Mae launched a new student loan program with death and disability discharges similar to those available on federal student loans.[7] Since then, about half of private student loans offer death and disability discharges.

In 2011, The New York Times published an editorial endorsing the return of bankruptcy protections for private student loans in response to the economic downturn and universally increasing tuition at all colleges and graduate institutions.[8]

A 2014 report from Consumer Financial Protection Bureau (CFPB), shows a rising problem with these types of loans. Borrowers face “auto-default” when cosigner dies or goes bankrupt. The report shows that some lenders demand immediate full repayment upon the death or bankruptcy of their loan cosigner, even when the loan is current and being paid on time.[9]

The biggest student loan lender, Sallie Mae, was formerly a government-sponsored entity, which became private between 1997-2004. A number of financial institutions offer private student loans, including banks like Wells Fargo, and specialized companies. There are also a number of state-affiliated, nonprofit student loan lenders, which account for approximately 10% of the private student loan market. This segment includes organizations such as VSAC and Higher Education Loan Authority of the State of Missouri,[10] Student loan search and comparison websites allow visitors to evaluate loan terms from a variety of partner lenders, and financial aid offices in universities typically have a preferred vendor list, but borrowers are free to obtain loans wherever they can find the most favorable terms.[11]

As the economy collapsed in 2008-2011, many players withdrew from the private student loan lending world.[12] The remaining lenders tightened the credit criteria, making it more difficult to receive a loan. Most now require a credit-worthy cosigner.[13] After the economic collapse of 2008, a number of peer-to-peer lending and alternative lending platforms emerged to help students find private student loans. For example, U.S. online marketplace lending platform LendKey allows consumers to book loans directly from community lenders like credit unions and community banks.

• "The Many Pitfalls of Private Student Loans," New York Times, September 4, 2015