Private Student Loan Lending Parallels Sub-Prime Lending

Report from Consumer Financial Protection Bureau and US Department of Education shows shady lending practices

Mirroring the sub-prime mortgage scandal, lending institutions used shady practices in a quest for profits in issuing private student loans that left hundreds of thousands of students with debt they cannot escape, according to a report released Friday from the Consumer Financial Protection Bureau (CFPB) and the US Department of Education.

Indentured Student - Cartoon

"Subprime-style lending went to college, and now students are paying the price," said Education Secretary Arne Duncan.

Comparing the subprime lending and private student loans, Jeff Gelles of the Philadelphia Inquirer explains : "As the housing bubble ballooned, it was fueled in part by lenders' ability to make loans and then quickly resell them to so-called securitizers -- Wall Street firms that packaged them as bonds -- without retaining any of the risk. The report says the same thing happened in the market for private student loans."

The report found that between 2005 and 2007, lenders targeted students directly, without educational institutional involvement, whereby students did not learn about other, less risky Federal loans. These kinds of loans also let students take out more than their educational need.

Lenders also targeted students at for-profit institutions. "In 2008, 42% of undergraduates at for-profit colleges took out a private student loan, while only 14% of all undergraduates used a private student loan," the report states.

The borrowers were often unaware of the all the terms of their loans. "The first time they ever really understood how much they owed was when the first bill arrived," Duncan said. Unable to repay, there is now $8.1 billion in defaulted private loans.

Students with the tremendous private student loan debt are unable to break free from its chains by declaring bankruptcy, which Sen. Dick Durbin (IL) would like to see changed .

"There is no reason why private student loans should get treated differently from other private debt in bankruptcy," Durbin said at a Senate subcommittee hearing in March. "And it is especially egregious that these private loans are non-dischargeable in cases where a student was steered into the loan while the student was eligible for safer federal loans."

"Borrowers who took out loans at the height of the boom are still suffering from those excesses," CFPB Director Richard Cordray said.

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