Counseling and consumer protections like those provided to assist some home buyers could help protect students and their parents from misleading lending practices in the private student loan market that can result in unmanageable debt, according to a report by the California Research Bureau (CRB).
"Impartial information and personal counseling for students and their parents are critical to helping secure the most advantageous funding available," the report states. "This is an important function of school financial aid offices."
The report notes that undergraduate and even graduate students are often unsophisticated borrowers and may agree to loan terms they do not fully understand. They may also not realize that they have the option of less expensive federally subsidized and guaranteed loans.
The experience of a University of California graduate student who was marketed a private student loan by a bank when she signed up for a checking account is detailed in the report as an example of misleading lending practices. The student understood she was receiving a loan with a much lower interest rate and favorable repayment options. When the first bill arrived, she found she had a loan with a 14.5 percent interest rate loan that compounds daily, leaving her with unmanageable debt.
"Middle class families are being victimized by private student loans that can only be called predatory," California Assembly Speaker pro Tempore Sally Lieber told the California Chronicle. "Families of high school seniors are bombarded by private offers that may or may not be in their best interest. Federal and state government has the responsibility to provide real consumer protections against unscrupulous lenders and abusive loans."
Lieber commissioned CRB to write the report.
The report notes that a higher percentage of students attending for-profit, proprietary postsecondary schools take out student loans. In 2003-04, 80 percent took out a federal loan and 15 percent took out a private loan (compared to 52 percent and 5 percent respectively of students at public four-year schools). These students are disproportionately from low income families, 26 percent of which earned less than $20,000 in 2006. In 2006, the average debt of graduating seniors in California public four-year colleges was $17,200, and 47 percent of the graduates were in debt. Borrowing was highest among students attending private four-year and for-profit schools.
Misleading lending practices in the private student loan market are a particular concern in California where students are less likely to receive need-based Pell Grants and federally subsidized and guaranteed Stafford Loans, and may consequently be more reliant on expensive private student loans, according to the report.
In addition, the report highlights that the increasing level of debt is an important concern for students who find their career choices and life options constrained by debt. This is a concern for policymakers because lower-paid public service occupations such as teaching do not offer salaries that can support large loan repayment obligations.
This suggests the need for more aggressive financial aid counseling by institutions, and nonprofit lenders and guaranty agencies, according to the report.
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