The Pros And Cons Of Private Student Loans

Student Loans are currently a source of debt that is quickly expanding with in the total of our federal debt. The expansion within the secondary and post-secondary education prompted the need for the federal government to subsidize the student loan programs. Students that needed to finance their education had to take out several loans through different financial institutions. After graduation the student was left with several high interest loans that were very difficult to pay back. These institutions were accused of predatory lending practices and the entire system was restructured with the federal government guaranteeing these highly volatile financial products. By backing these highly risky loans the government began to incur debt at an alarming rate from the default of these unsecured products.

American consumers owe more than $150 billion in outstanding private student loan debt. This amount is significantly less than the amount outstanding on student loans guaranteed by the federal government, the private student loan (“PSL”.) From 2005 – 2007, lenders increasingly marketed and disbursed loans directly to students, reducing the involvement of schools in the process grew from 18% to over 31%. As a result, many students borrowed more than they needed to finance their education. Additionally, during this period, lenders were more likely to originate loans to borrowers with lower credit scores than they had previously been. These trends made private student loans riskier for consumers. (Consumer Financial Protection Bureau, 2012) Per the federal governments finding the issue was the conflicting interest of the institution marketing these loans without taking the students ability to make sound monetary decisions. It seemed that ...

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...luence in the system by placing more burden onto the institution. Higher Education Act, the law governing federal funding of financial aid, due for reauthorization this year, policy-makers have a chance to address the persistent issues of aid and access for all. Changes under consideration include increasing the maximum Pell Grant award, getting rid of origination fees (an upfront tax on borrowers), and improving loan repayment options. In addition, the Bush administration has proposed overhauling how government aid is doled out to universities, with an emphasis on redistributing monies from rich schools to those with more low-income students. A growing number of individual institutions are taking steps to ease the financial burden of a college education. Princeton led the way in 2001 by eliminating all need-based loans in favor of grants for those on financial aid.