Private Loan

Private Student Loans Consumer Reaction

What We Can Learn From Suze Orman

The other night I had television on, just on, background noise. At some point in the evening the Suze Orman Show came on. I paid relatively little attention until one of her guest callers asked her opinion on student loans: Her daughter was in the process of choosing colleges. She was down to a choice between a private, four-year college and a state university. Did Suze think the value of the private college matched the increased expense or should she encourage her daughter to choose the more affordable state university? And would the education at the state university offer comparable value?

Two separate college issues were addressed in that call:

• Value between types of colleges
• Expense of high tuition costs

Lesson One from Suze: The additional cost associated with the four-year college would most likely have to be financed via private student loans. According to her, an absolute no-no.

Lesson Two from Suze: She attended a state university and look where she is right now.

Private Student Loans: The Bottom Line Revealed

Private student loans, or alternative student loans, have generated colossal business for lenders—really the meat and potatoes—in the last few years. The startling statistics (College Board): Since 2001 private student loan borrowing has increased 27 percent annually and is fattened enough to monopolize 20 percent of the student loan market. Just a decade ago, private student loans constituted a mere sliver–7 percent–of the same market. Regionally the behavior may be even worse; one source reports that private student loan borrowing among Maryland students has increased by 600 percent since 2000.

As I speak there are some alarmists extolling the evils of the private student loan market—bloated beyond belief, they say, could cause another market debacle not unlike the recent mortgage fiasco. But how did the alternative student loan market get so heady? The advertising message is: don’t worry if your federal student loans don’t cover the cost of your education; with a private loan you can carry enough credit to cover everything, in some cases even add on auxiliary expenses such as textbooks, transportation, and computers.

No Limits and Interest Rates as High as Your Worst Credit Card

Suze’s message was, of course, right: private student loan interest rates are all over the place and lenders may hike them at will, much like those attached to credit cards. Also, most have no limit. Borrow as much as you’d like—no problem…. Lenders sell them as easy, as quick and simple as opening a checking account. You can be approved and paid overnight, so the perception is that these loans are no big deal. It’s usually thousands and thousands of dollars worth of a deal.

Private Loan Gluttons

Some in the education industry have commented that the gluttony in private loans is due in large part to the leaner Pell Grants. Hmmmm. Pell Grants certainly fail to cover the same costs they did when they were first established, but the statistics I’ve seen suggest that it may not be the Pell Grant crowd gobbling up the private loans—it’s middle to upper income students! A sample of student loan data (ECMC Group) from 1992-3 and then again in 1999-2000, reveals absolutely no increase in the number of low-income students borrowing with student loans. BUT—here’s the dope: middle income borrowing increased “from 32 to 45 percent” and upper income borrowing “from 15 to 31 percent.”¹

Where’s the Steering Wheel for this Fancy Sports Car?

Stories emerge that illustrate how ignorant college borrowers really are when choosing private loans. The sad reality is that for many college grads there is little latitude following graduation for traditional rites of passage, such as hiking across Europe or volunteering with the Peace Corps. Those times are gone. Better find a damn good job because loan repayment is knocking on your door and it’s a pretty big payment for a pretty long time–and it doesn’t come with a high performance engine or a steering wheel.

Cultural Barriers to Incurring Debt, ECMC Group Foundation, March 2003, accessed September 6, 2007, http://www.ecmcfoundation.org/documents/CulturalBarriersExecSummary.pdf.

© 2008 Student Loan Information.