As the cost of higher education continues to increase and federal and private student debt nears the $1 trillion mark, lawmakers and regulators are zeroing in on private student loans.
A bill introduced by state Senate Majority Leader Ellen Corbett, D-San Leandro, and advanced this week through the Senate Education Committee would require universities to provide clear information to students about private student loans.
Meanwhile, Kentucky Attorney General Jack Conway, the leader of a group of 23 state attorneys general investigating the nation?s for-profit college industry, revealed earlier this month that the group will focus its probe in part on institutional lending ? the private loans that for-profit colleges increasingly extend to students.
Federal loans only cover up to a certain amount of tuition and other educational costs. Some college students finance the rest of the cost by taking out private loans, which in general tend to have higher rates and less favorable terms than government loans.
While the federal Truth in Lending Act requires lenders to disclose rates and terms, Corbett?s bill would go further, requiring California colleges and universities themselves to clearly distinguish private loans from federal loans in individual financial aid awards in the institutions? award packages, publishing the rates and terms.
?Most students and their families are confused by the loan process,? Corbett said at the Wednesday hearing. ?I can add my name to the list on that process with my own son. And often, important information is not necessarily accessible.?
Lori Nezhura, legislative director for the California Student Aid Commission, told lawmakers at the hearing that more light needs to be shed on private student loans.
?When students default on their private student loans, the debt is quickly increased by fees, penalties and collections costs,? she said.
Kelsey McQuaid, who recently finished her last quarter of study at UC Davis, told the committee that she was lucky that when her father lost his job and she had maxed out on federal student loans, her mother warned against taking on private student loan debt.
?My mom said, ?Whatever you do, do not take out a private loan if you can avoid it,? ? McQuaid said. ? ?Do not do it because you?re going to regret it when you?re 40 years old and still in massive debt and accumulating interest.? ?
Instead, McQuaid said, she shaved $200 off her monthly rent expense by moving out of her apartment and sharing a room, and she took on more hours at the coffeehouse where she worked.
At a March 20 hearing of the U.S. Senate Judiciary Subcommittee on Administrative Oversight and the Courts, Kentucky Attorney General Conway said a group of state attorneys general investigating for-profit colleges has found institutional lending by these colleges to be a ?common target? among the attorneys general.
Conway described the loans as a way for the colleges to rake in federal dollars on the backs of financially vulnerable students.
For-profit college companies acknowledge that many students who receive their institutional loans will default on them. But because the loans enable students who otherwise couldn?t afford the high tuition to attend, the institutions benefit because the students bring federal financial aid with them.
Also, private loans help colleges meet federal requirements. Federal law requires that no more than 90 percent of a for-profit college?s revenues come from federal student aid. Private student loans, including those issued by the college itself, can count toward the other 10 percent.
?The 90/10 rule drives everything,? Conway said.
In California, for example, Santa Ana-based Corinthian Colleges Inc. announced in a 2009 earnings conference call that it expected a loan default rate on its institutional loans of about 55 percent for 2009 and predicted a range of 56 to 58 percent in 2010, according to a January 2011 report by the National Consumer Law Center.
Despite the high risk of default on these loans, the company disclosed in an August 2011 filing with the U.S. Securities and Exchange Commission that it had entered into a new agreement with a third-party lender, ASFG, that would fund about $450 million in new student loans over the next two years.
While the loans will be made by ASFG, Corinthian is taking on the risk. The company is required under the agreement to purchase any of the student loans on which no payment has been made for more than 90 days.
Deanne Loonin, director of the National Consumer Law Center?s Student Loan Borrower Assistance Project and author of the January 2011 report, said for-profit colleges see the loans as profitable despite the negative consequences for the students, many of whom they expect to default.
?It helps show they don?t care if the loans get paid off or not,? Loonin said.
Kendall Taggart of the California Watch staff contributed to this report.
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