A couple of years ago the financial aid industry saw a huge change in the process of awarding federal student loans, thanks to New York
Attorney General Andrew Cuomo and Congressional Democrats. At the time, it was a huge hit on how colleges awarded loans because schools were banned from assigning a lender to a student. I still believe the action was not in the student's best interest, but on the bright side I think colleges have offered better consumer information on student loans as a whole.
Now, the target is the private loan industry and loans offered by for-profit colleges. The Obama administration is trying to create a Consumer Financial Protection Agency to regulate these types of loans. Is that a bad thing? I don't think so. Why? Have you ever taken out a private loan? Or at least looked into taking out one? I am not saying that private loans are bad, but one has to be very careful and do extensive research. Some opponents to private loans liken them to credit cards, where interest rates are high and failure to pay will ruin your credit.
Private loans are usually taken out to 1) supplement the federal Stafford Loan and other financial aid, or 2) be the only financial resource for students enrolled in schools that do not qualify for federal student aid. Because these loans are not federally regulated, entities can charge exorbitant fees and require students to repay immediately. In my experience, students who have taken out a private loan tell me they will be paying interest rates anywhere from 6% to 16% (sounds like credit card rates?). Not only that, but private lenders may gladly loan funds to high-risk students-those with high dropout rates, which increases the amount of loans that go into default. And if increased numbers of loans do go into default, chances are your interest rate will go up to cover those bad loans.
I can't say that I support the proposed Consumer Financial Protection Agency because I have yet to see the written proposal. However, I do support any action taken to support students as consumers. For now, I can offer several suggestions if you are thinking of taking out a private loan:
- Research and compare private lenders. Mark Kantrowitz has a comparison list of the more popular private loans through his finaid.org website. (Take an indepth look at his excellent website)
- Compare interest rates and repayment plans for private loans to select which best fits your needs.
- Utilize a co-signer. In some cases, using a co-signer will lower your interest rate.
- Find out if the lender will sell your loans. While this seems trivial, many lenders turn around and sell their loan portfolios. You may find it difficult to track down who owns your loan when you have questions.
I am not against private loans. In fact, with the rapidly rising college costs over the past 10+ years, I know it's a necessity. What I am saying is that one has to be very careful to select a private lender who has the student's best interest in mind.