Consumer Law Report Blasts For-Profit Colleges for Private-Label Student Loans

A new report issued in January by the National Consumer Law Center accuses for-profit colleges of saddling their students with unregulated private-label student loans that force these students into high interest rates, excessive debt, and predatory lending terms that make it difficult for these students to succeed.

The report, entitled “Piling It On: The Growth of Proprietary School Loans and the Consequences for Students,” discusses the boom over the past three years in private student loan programs offered directly by schools rather than by third-party lenders. These institutional loans are offered by so-called “proprietary schools” – for-profit colleges, career schools, and vocational training programs.

Federal vs. Private Education Loans

Most loans for students will be one of two types: government-funded federal student loans, guaranteed and overseen by the U.S. Department of Education; or non-federal private student loans, issued by banks, credit unions, and other private-sector lenders. (Some students may also be able to take advantage of state-funded college loans available in some states for resident students.)

Private student loans, unlike federal undergraduate loans, are credit-based loans, requiring the student borrower to have adequate credit history and income, or else a creditworthy co-signer.

The Beginnings of Proprietary School Loans

Following the financial crisis in 2008 that was spurred, in part, by the lax lending practices that drove the subprime mortgage boom, lenders across all industries instituted more stringent credit requirements for private consumer loans and lines of credit.

Many private student loan companies stopped offering their loans to students who attend for-profit colleges, as these students have historically had weaker credit profiles and higher default rates than students at nonprofit colleges and universities.

These moves made it difficult for proprietary schools to comply with federal financial aid regulations that require colleges and universities to receive at least 10 percent of their revenue from sources other than federal student aid.

To compensate for the withdrawal of private student loan companies from their campuses, some for-profit colleges began to offer proprietary school loans to their students. Proprietary school loans are essentially private-label student loans, issued and funded by the school itself rather than by a third-party lender.

Proprietary Loans as Default Traps

The NCLC report charges that these proprietary school loans contain predatory lending terms, charge high interest rates and large loan origination fees, and have low underwriting standards, which allow students with poor credit histories and insufficient income to borrow significant sums of money that they’re in little position to be able to repay.

In addition, these proprietary loans often require students to make payments while they’re still in school, and the loans can carry very sensitive default provisions. A single late payment can result in a loan default, along with the student’s expulsion from the academic program. Several for-profit schools will withhold transcripts from borrowers whose proprietary loans are in default, making it nearly impossible for these students to resume their studies elsewhere without starting over.

The NCLC report notes that more than half of proprietary college loans go into default and are never repaid.

Recommendations for Reform

Currently, consumers are afforded few protections from proprietary lenders. Proprietary school loans aren’t subject to the federal oversight that regulates credit products originated by most banks and credit unions.

Moreover, some proprietary schools claim that their private student loans aren’t “loans” at all, but rather a form of “consumer financing” – a distinction, NCLC charges, that’s “presumably an effort to evade disclosure requirements such as the federal Truth in Lending Act” as well as a semantic maneuver meant to skirt state banking regulations.

The authors of the NCLC report make a series of recommendations for reforming proprietary school loans. The recommendations advocate for tough federal oversight of both proprietary and private student loans.

Types of Student Loans Available

As a high school student the next step you wish to take is to join college. You need money to do this as college education costs a lot of money. If you’re independent or your parents are unable to support you then you need to think about student loans to support you through college. Our Federal government has come up with various financial packages that will help students like us to pass out of college and get a good job.

There are two types of student loans available. Federal loans and Private loans. These loans help a student to pay for tuition, books and living expenses. The major advantage of these loans are the returning period starts six months after you complete your education and the interest on the amount is very low. That is why it is attractive for students to go in for student loans. The popular Federal student loans are Stafford Loan, Perkins Loan and Plus Loan.

Stafford Loan- Federal Stafford loans are given by the government for students who wish to study at least half time in college (graduate and under graduate courses). This is a very popular loan that is availed by students as it is a fixed loan with very low interest rates. A student is allowed to borrow $20,000 per school year. The students can borrow this amount directly from the Department of Education through the school they are joining in.

Perkins Loan- Federal Perkins Loan is given to students who are in financial need for attending post secondary education programs. The amount depends upon the individual’s need and there is a standard formula that the financial aid office follows to disburse the amount directly to the institution where the student is enrolled. It is advisable to apply for Federal aid as early as possible as it is on a first come first serve basis.

Plus Loan- Federal Plus Loan is given to parents who wish to educate their children in college. Parents who have good credit rating can apply for Plus Loan to help finance their son’s or daughter’s college expenses. This money can be used for tuition, supplies, housing and so on. The procedure is the same as the other two Federal Loans. Here EFC (expected family contribution) is also looked into so that the financial aid office can arrive at the exact amount to be disbursed. Also the parent’s credit rating including income tax returns, assets and loans if any as well as how many children are studying in college is taken into consideration before deciding upon the loan entitlement.

Private loans – Besides Federal loans there are private banks and lenders who offer student loans as well. The criterion is the same and the procedure is also the same. FAFSA form should be filled and submitted to the lender along with your application. Some of the popular private student loan programs are Sallie Mae, Citi student loans, Monticello, Chase loans to name a few. Private loans basically depend upon your credit worthiness. A co-signer with good credit rating can get you a private student loan. Though it is fixed interest rate, be careful before you borrow.