College students who borrow from private lenders often assume that private and federal student loans work the same way. The two could not be more different.
Federal loans, for example, have low, fixed rates and broad consumer protections that permit people who run into trouble to make partial payments or to defer them altogether until they recover financially.
Private student loans from banks and other lenders typically come with variable interest rates, which means that borrowers who misunderstand the conditions of the loan can be shocked to find what they owe in the end. In addition, private loans offer limited consumer protections, leaving borrowers who get into trouble with few options other than default.
These drawbacks are bad enough, but the federal Consumer Financial Protection Bureau now finds other problems. Borrowers have been forced into default without warning. Borrowers with perfect credit histories can suddenly be required to pay the full amount of the loan if someone who co-signed on the loan dies. Some have received the bad news, accompanied by threats of legal action, even as they mourn the death of a parent or grandparent.
These unfair contracts date from the fiscal crisis, when investors were burned by securities backed by sloppily drawn student loans to borrowers who had not been properly vetted. The upshot was that more lenders began requiring co-signers. That seemed reasonable. But the agency report shows that lenders are springing surprises not only on borrowers but on co-signers, keeping them tied to loans long after borrowers have proved their creditworthiness.
Federal regulators clearly have a lot to do to address what amounts to a student loan crisis. (Total student indebtedness is now about $1.2 trillion.) They can begin by preventing contracts that unfairly burden borrowers in the private market, who owe $150 billion.
— The New York Times
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