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Shining a brighter light on student loans

  • Blog Post by: Eric Wieffering
  • November 17, 2011 - 8:48 AM

Sunday's column about high debt loads shouldered by college grads prompted this dissent, published today, from the president of Macalester College, Brian Rosenberg.

The flaw in Rosenberg's argument comes in the example he uses to illustrate his point: his own school. Yes, compared to the total cost of attending Macalester, average debt of $19,000 seems reasonable in light of a total sticker price that exceeds $200,000. But most young people don't go to private colleges with big endowments that can be used to defray the total cost. They attend public universities, where the debt/total cost ratio is much more out of whack.

I also heard from a lot of readers who are struggling with crushing pyaments on private loans.

Now, maybe you thought private lenders got out of the higher education business a couple of years ago, after Congress ended a subsidy that the government used to pay them to provide and administer loans. That subsidiy applied only to federally insured loans, which are now granted and administered directly by the federal government.

Private loans are what families turn to in addition to college-provided financial aid. Here's what the Wall Street Journal said about them earlier this week:

Uncertainty about student defaults has essentially frozen the market for bonds backed by student loans that aren't guaranteed by the government. The volume of such bonds secured by loans made by SLM Corp., also known as Sallie Mae, is at just 16% of the level in 2009, according to rating firm DBRS Inc.

In many cases Sallie Mae is refusing to lend to students unless they can get parents to co-sign on the loans. Almost 70% of students who took out private loans with Sallie Mae since 2008 were forced to have a parent co-sign, compared to just half the students who borrowed with the lender from 2002 to 2007.

What this boils down to for prospective students is that banks are lending less, and charging higher interest rates for the loans they do make. Colleges, on the other hand, aren't charging any less.

Which means students and their families are borrowing more than ever. 

This experience, from one reader, was not atypical:

I am co-signed with my son for originally 102K; after paying over 40K we still owe 115k. ... We will be paying until we are 85. They will receive about 250K by the time we get done.

On Wednesday, the Consumer Financial Protection Bureau announced that it had launched a wide-ranging look into the private loan market, which it described as "one of the least understood credit markets." They're looking for input from lenders and borrowers, with comments due in the next 60 days. You can learn more about it here.

 

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