Private Student Loans: Borrower Beware

Privately financed college loans were less than 10 percent of the $1.3 trillion in unpaid student debt last year, according to the Consumer Financial Protection Bureau. The bulk of student loans are funded by the federal government. But the minority who borrow from private financial institutions often learn painful lessons after graduation: it is much more difficult to negotiate affordable repayment plans with private lenders. Private loans are unlike federal student loans, which have standardized repayment options and procedures.

This blog is intended to help parents and future college students avoid getting into difficult situations in the first place with private loans. Squared Away interviewed two student loan experts at Clearpoint Credit Counseling, an Atlanta non-profit: Terrence Banks, a counselor who works directly with borrowers, and Thomas Bright, a blogger.

Question: Graduates trying to renegotiate their private loans conveyed some harrowing stories in Clearpoint’s 2013 blog post. Have things improved since then?

Terrence: The complaints are still valid and still rampant. But some – not all – private lenders have stepped up to the plate to make private loans a bit more financially feasible.

Q. What would you advise parents and matriculating students do when making their first borrowing decisions?

Terrence: Exhausting the federal loan option is paramount before you go to the private loans. If you find yourself in trouble where you can’t make a payment, you have more options under the federal than the private loans. Also try to find out the potential income for your future profession before going down this road and borrowing at all. And then look for grants – there’s a slew of grants that are untapped each year because people don’t take the time to access them because student loans are so readily available.

Q. How do borrowers get themselves into the situations like this one, described on your blog? “I am able to consolidate my federal loans (big help on the monthly payments) but not my private loans.” Borrowers also talk about inflexible private lenders and being harassed with phone calls from these lenders.

Terrence: People, when they take on these loans, aren’t paying attention that they have to pay them back. Often, it’s past the point of an individual being able to pay it off completely. Are they going to even be able to service the accrued interest? What’s not being talked about is that these companies are institutions that make money, so I counsel people that a loan is not just to give you an education but to make a profit. Young people need more education before they take that on.

Q. Given there is federal financing, why do people need private loans?

Terrence: The parents may not be there to qualify for some of the federal options. Also, because the cost of education has increased dramatically, borrowers may not qualify for enough federal loans to pay all of their tuition, which leads them into the private loans.

Thomas: One thing we’ve heard on our blog is that sometimes students take out significantly more in student loans than they need to cover their living expenses or whatnot. We also hear about people using them for some extravagant items that aren’t relevant to their college experience – that does get people in trouble too.

Q. Given the prices of tuition these days, are the maximums allowed for federal loans adequate to cover most tuitions, without going into private debt?  

Terrence: Yes, typically there is enough for a public university. When I talk to them, though, they say, “I took out more than I needed.”

Q. In the 2013 blog post, why did you call private student loans a “crapshoot?”

Thomas: It may be getting better, but I was putting myself in the shoes of someone who wanted to take out a private student loan at the time. How could I compare the differences? It’s not easy to tell one loan from the other, and how different would my experiences be with different lenders? With federal loans, the rules are the same no matter who my servicer is – they’re mandated by federal rules. But if you take out private loans, you’re subject to, say, Discover’s versus Sallie Mae’s private loan terms. You can compare interest rates upfront but not the repayment plans and the flexibility they will offer in repayment later on. You might be lucky and get a lender with a flexible plan or you may not.

Q. Can borrowers find out private lenders’ repayment options before they borrow?

Thomas: Companies are getting better, but for an average 18 year old, it’s incredibly difficult to find that information. It’s a big step even for a teenager to realize they need to compare interest rates – not only that, but what if I don’t get a job after I graduate and how does that affect my repayment? That’s financially complicated and out in the future, and I don’t think a lot of young people are thinking that way.

Q. In the blog, you often seemed helpless in advising graduates with private loans – in contrast to what you’re able do about federal loans. Is that correct?

Terrence:   I totally agree. I struggled with how to respond because some of those people have given us very, very specific information about their income and monthly payments, and you realize very quickly they are in unrealistic circumstances. You’ve got to call your lender. But if you do all those things and don’t get offered any flexibility, it’s a really tough situation to be in. I think refinancing your loans is such a great tool, if you can bring an interest rate down from 12 percent to 3 percent or 4 percent. That’s a great piece of advice but unfortunately so many people in trouble aren’t able to access that great tool, because they don’t have good credit scores.

The good news is that, initially, I used to get a lot more calls based on private loans. But the large majority of loans now are federally based. When private companies service federal loans, however, it also complicates the repayment negotiations dramatically. I have a couple tomorrow. Navient is servicing both their federal and private loans, but the couple can’t distinguish them. They have to know the difference since this servicer handles both.

Q. What about students with jobs? Do they have more options?

Terrence: Yes. If they already have the jobs, I might steer them, based on their income, to improve that credit score and find a way to consolidate.

Thomas: Or refinancing might be the best option for private loans, but it’s also hard to do if you don’t have good enough credit or the right income level to qualify. There are programs out there like PAVE, which refinances using unusual criteria such as your earnings potential in the future.

An issue with private loans is that the lenders don’t always have an incentive to point you toward what’s in your best interest. That’s because refinancing would mean going to another financial institution, and they don’t want that. Federal loan servicers, on the other hand, are more likely to help you navigate the options available and determine the pros and cons of each option.

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