Released: October 25, 2006

Private student loans pose greater risk

Source: By Sandra Block, USA Today

When Jeremy Hynd graduated from Vanderbilt University in 2004, he applied to consolidate $44,000 in student loans. With interest rates then at record lows, consolidation offered the opportunity to lock in a 2.5% rate for the life of the loan.

But Hynd discovered that $27,000 of his loans weren’t eligible for federal loan consolidation because they were private student loans. The rates on the two private loans have since jumped to 8.7% and 11.7%, from 5% and 8%, when he was in school. Hynd, 24, an analyst for Sony Pictures Television in Los Angeles, recently took on a second full-time job so he can pay off his private loans as quickly as possible.

Private loans are the fastest-growing sector of the multibillion-dollar student loan industry. In 2005-06, college students borrowed a record $17.3 billion in private loans, up 913% from a decade ago, according to a report issued Tuesday by the College Board.

At a time when the cost of college is surging and financial aid is shrinking, private loans make it possible for many students to attend colleges they couldn’t otherwise afford. But consumer advocates and student groups worry that the growth of these loans could prove disastrous for borrowers who don’t understand the risks.

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