Student loans turn into crushing burden for unwary borrowers – Los Angeles Times

PERSONAL FINANCE

Student loans turn into crushing burden for unwary borrowers

Michael Robinson Chavez / Los Angeles Times

HEAVY DEBT: Natalie Hickey, who graduated from Brooks Institute in Santa Barbara, picked up $140,000 in student loans, some of it at rates as high as 18%. Monthly payments of $1,700 are more than her rent and car payment combined.

Some who think they are getting a federal loan find out later that they hold a private loan. The difference can be costly.

Kathy M. Kristof, Personal Finance
December 27, 2008

One in a series of occasional stories

Natalie Hickey left her small hometown in Ohio six years ago and aimed her beat-up Dodge Intrepid for the West Coast. Four years later, she realized a long-held dream and graduated with a bachelor’s degree in photography from Brooks Institute in Santa Barbara.

Paying for college

Natalie Hickey

She also picked up $140,000 in student debt, some of it at interest rates as high as 18%. Her monthly payments are roughly $1,700, more than her rent and car payment combined.

“I don’t have all this debt because I was buying stuff,” said Hickey, who now lives in Texas. “I was just trying to pay tuition, living on ramen noodles and doing everything as cheaply as I could.”

Hickey got caught in an increasingly common trap in the nation’s $85-billion student loan market. She borrowed heavily, presuming that all her debt was part of the federal student loan program.

But most of the money she borrowed was actually in private loans, the fastest-growing segment of the student loan market. Private loans have no relation to the federal loan program, with one exception: In many cases, they are offered by the same for-profit companies that provide federally funded student loans.

As a result, some students who think they are getting a federal loan find out later that they hold a private loan. The difference can be costly.

Whereas federally guaranteed loans have fixed interest rates, currently either 6% or 6.8%, private loans are more like credit card debt. Interest rates aren’t fixed and often run 15% or more, not counting fees.

Most students have little experience in taking out loans, yet the federal government doesn’t require lenders to disclose the total cost of a student loan and other terms upfront — before signing — as it does for car loans and mortgages.

“Students are in the cross hairs, being bombarded by very sophisticated and, to some extent, ethically marginal lenders,” said Rep. George Miller (D-Martinez), who sponsored legislation passed this year that will require lenders to provide more disclosures on fees. “My fear is that we are developing a predatory market, just like we have had in mortgages.”

About $15 billion in private student loans are expected to be funded this year, a 900% increase from a decade ago, according to the nonprofit College Board. Private loans are growing faster than federally guaranteed loans, which rose 59% over the same period, in part because of limits on how much students can borrow with the government’s backing.

Four years at a public university, including room and board, costs an average of $57,332, according to the College Board. The average tab for a private university is $136,528. Yet the maximum that can be borrowed under the federal loan program is $31,000.

High-cost private loans fill that gap. One result is that students now average nearly $20,000 in debt by the time they graduate, twice as much as a decade ago.”

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