In the years leading up to the financial crisis, the market for private student loans was booming, driven in part by aggressive marketing practices and risky loans, according to a new report by the U.S. Department of Education and the Consumer Financial Protection Bureau.
But after the onset of the recession, private loan borrowers found themselves buried under a mountain of debt, with few options for getting out.
Education Department and bureau officials released the report Thursday. According to the report, student loan borrowers are still feeling the effects of risky industry practices and the boom-and-bust pattern of the last decade, leaving the nation with $8.1 million in defaults on private loans to date.
During the mid-2000s, the market for private student loans was similar to the market for subprime mortgages — both were marked by aggressive marketing and relatively lax consumer protection standards, the report says.
Although those practices have largely changed for the better since the onset of the recession, students who took out private loans from 2004-2008 were left trapped with that debt, unable to rid themselves of it even by filing for bankruptcy due to a 2005 change in the bankruptcy code.
According to the report, some private lenders bypassed college and university financial aid offices entirely, marketing their loans directly to students and parents. In 2005, 60 percent of private student loans were certified by the college or university the borrower attended. By 2008, that number had dropped to 27.8 percent.
Because financial aid offices were removed from the picture, universities were unable to review students' financial need and compare it to the loan amount.
That meant students often borrowed more than they needed, eventually leaving them overwhelmed by debt.
In 2006, students in the sample borrowed nearly 150 percent of the cost of tuition in private loans alone, even before factoring in any federal loans or grants the students received.
Private student loan debt accounts for a small minority of the total student debt in the United States. The largest share — about 86 percent — is debt from federal student loans, such as Stafford Loans or Perkins Loans.
Part of the reason students wind up bogged down in debt comes from a lack of understanding about the differences between private and federal loans, said bureau director Richard Cordray.
For many of those students, paying for college is the first major financial decision, Cordray said during a conference call with reporters Thursday.