Private loans for students can become traps

Student loans are commonly referred to as "good debt" -- the kind of debt people take on for a college degree and the promise of higher income that accompanies it.

But for some, there is nothing good about private student loans. Just ask Kristi Nelson and Jennie Fisher. Nelson graduated from St. Paul's College of Visual Arts in 2003 and has $55,000 in private student loans.

Fisher asked her father, John, and her grandmother to cosign her private loans to attend the Minneapolis College of Art and Design; they owe more than $88,000. They're all struggling to make monthly payments and are closely watching renewed efforts to make private student loans dischargeable in bankruptcy court.

The term "private student loans" can be confusing. It's sometimes used to refer to the Federal Family Education Loan Program (FFEL), the government student-loan program that's administered by private companies such as Sallie Mae and Wells Fargo. FFEL loans made news earlier this month when the House passed a bill that would remove the banks and lenders that act as middlemen and have the government handle the loans directly instead.

The private loans, or alternative loans that have Nelson and the Fishers scrambling to make debt payments, are different. They work more like credit cards, with variable interest rates as high as 18 percent and terms set by the lenders. Such loans have far fewer protections and guarantees for borrowers than do government-sponsored loans. Some critics consider private student loans to be the subprime products of higher education.

Because the cost of college has grown faster than the amount of federal loan money available, more and more students are relying on private loans to pay a part of their education. Private loan volume grew from $7.7 billion in 2003-04 to $22.4 billion in 2007-08, according to a policy paper by financial aid expert Mark Kantrowitz.

Safety not assured

Asher testified before the House Judiciary Committee on Wednesday about the need to treat private student loans like credit cards and other consumer debt in bankruptcy court. Unlike the consumer who racked up too much credit card debt and the homeowner who took on an unaffordable mortgage, college graduates with too much student loan debt cannot, in most cases, discharge the loans in bankruptcy.

"At least if you put your tuition on a credit card, it would be dischargeable in bankruptcy should you ever reach the unfortunate point of needing such relief," she testified. "Ironically, private loan creditors remain fully eligible for the bankruptcy protection that their borrowers are now denied," she added. Read the full testimony of Asher and others at judiciary.house.gov/hearings/ hear_090923_1.html.

These private loans also aren't included in any of the recent laws passed to make college more affordable, such as income-based repayment plans and loan forgiveness for certain altruistic occupations.

As the wheels slowly turn on Capitol Hill, what can graduates strapped with private loans do? Painfully little. "They are at the mercy of their lenders," Asher said.

You can call your lender to explore your options. Both Nelson, 49, and Fisher, 29, have loans with Student Loan Finance Corp. and postponed payment using forbearance or deferment. It was a temporary and pricey fix, because interest accrued on their loans during those periods. Since then, the only advice Nelson said she was given was to make her payments on time for the next 26 years. Fisher suffered near-fatal blood clots in her brain this summer and now is unemployed. When she called to ask for help, she said, she was told "you're out of options." A spokesman for South Dakota-based Student Loan Finance Corp. said he could not comment on specific borrowers' issues, but said the company always tries to work with borrowers having trouble repaying their loans.

Tough choices must follow

Calculate how much debt you can afford to repay. A Sallie Mae study found that 58 percent of families did not consider a student's expected starting salary when deciding how much to borrow. When asked about their estimated monthly loan payments, 23 percent of students had no idea and the rest quoted payments that didn't jibe with the total amount borrowed. If you realize you'll have trouble repaying, tough choices must follow. Should you work more, transfer to a different school, switch majors or live a more Spartan lifestyle?

Fisher, who lives in Bloomington and never has used her degree, wishes she had taken a year off between high school and college. At age 19, she said she "didn't fully understand" her loans. Her father urges relatives to think twice before cosigning a loan.

Nelson, of St. Louis Park, cleans houses and teaches fitness classes. She wishes she'd met with a financial adviser before taking on so much debt. If she could do it over again, she would also rethink her major.

"Check on the job outlook for what you're going to school for," Nelson said. "Art wasn't a good idea."