New Study: Subprime Loans Target Student Borrowers

Washington, DC — America's students are facing a serious threat from subprime private loans, and the situation could worsen unless Congress votes to close a potential loophole in the proposed Consumer Financial Protection Agency (CFPA), according to a new study published this week by the nonpartisan research and policy center Demos, the U.S. Public Interest Research Group (US PIRG), and the United States Students Association.

The study, Subpriming Our Students: Why We Need a Strong Consumer Financial Protection Agency, shows that aggressively-marketed, loosely-regulated private loans are miring an increasing number of students in unnecessary debt. A startling 67 percent of the U.S. bachelor's degree graduates last year had student debt, averaging about $23,200 per indebted student. While most of that debt is in safer, lower-interest federal loans, a significant amount is in private loans that can carry interest rates of over 18 percent. It also shows that nearly 3 million American students took out private loans last year, up from less than 1 million just four years before.

Demos and PIRG also published six additional state briefing papers on the private loan markets in California, Colorado, Connecticut, Indiana, Massachusetts, and Montana.

"For many student borrowers, taking out a private loan for college is almost like charging tuition on a high-interest credit card," said Heather McGhee, Director of Demos' Washington, DC Office and author of the study. "And like credit cards, private loans carry costly penalties and fees and are marketed heavily to students regardless of need, resulting in unnecessary and damaging levels of expensive debt that can strain young adults' finances well into adulthood."

The study points out tha just as Congress voted to reign in the worst abuses of the credit card market last summer, it should pass a strong Consumer Financial Protection Agency with the power to protect young borrowers from unfair and deceptive private student loan practices. A strong CFPA would allow millions of young Americans to finish school with lower debt burdens, enabling them to invest in their futures instead of owing thousands each year to private lenders. Demos, USSA and PIRG are calling on Congress to regulate all lending products under the proposed CFPA.

"Americans overwhelmingly support a strong CFPA that can, like the FDA does for drugs and the Consumer Product Safety Commission does for toys and electronics, keep us safe from toxic financial products," said McGhee.

The report points out, however, that a loophole in the House CFPA bill could allow certain colleges-those that are run solely to make a profit-to make private loans to students without abiding by the CFPA's consumer protections. This exemption would leave the more than over 2 million students who attend for-profit schools vulnerable to abusive loans. For-profit college students are already burdened with the highest average debt loads in the nation, at $32,650 nationwide, versus $22,380 for private non-profits and just $17,700 for public colleges. And they are most likely to have dangerous — and unnecessary private student loans. But due to intense lobbying, Congress is poised to create a permanent loophole allowing for-profit colleges to operate under a different set of rules than the rest of our nation's colleges.

"House members have the opportunity to amend the CFPA bill to close the for-profit school loophole," said McGhee. "Given the well-documented instances of loan fraud and boiler-room operations in many for-profit schools, the last thing Congress should do is shield these players from scrutiny."

McGhee continued, "Congress has a choice next week. Millions of out-of-work young people are seeing ads every day from for-profit schools that offer a quick route to a good job. But they don't know that the loans these schools offer could leave them with tens of thousands in high-interest debt. Congress must step in and pass a Consumer Financial Protection Agency without loopholes to give America's young people a fair shot at getting ahead in a tough economy."

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