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Published: November 2008

Taxpayers shouldn’t bailout private student loan lenders

Representatives of students, consumers, colleges, administrators, and counselors wrote to Treasury Secretary Henry Paulson asking him to reconsider the government's plan to allocate funds from the $700 billion economic rescue package to private student loan providers.

Download the letter to Secretary Paulson

Below is a summarized excerpt from the letter:

Most students and families do not use private student loans to pay for college, nor should they. Private loans are risky and expensive, and lack the protections, oversight, and regulations of safer federal loans. Furthermore, providers of private student loans already receive special treatment in bankruptcy at borrowers’ expense. Billions of taxpayer dollars should not be spent enabling lenders to continue making these high-risk loans. 

Most students do not use private loans to pay for college.

• The Project on Student Debt estimates that only about eight percent of undergraduates who graduated last year took out private loans. 
• Financial aid experts and lenders agree that private loans should only be used after all federal financial aid options have been exhausted. These include Parent PLUS loans that are available up to the full cost of attendance.
• Federal student loans are as available as ever, despite the credit crunch. In fact, Congress increased the maximum federal student loan limits and has taken other steps to ensure the continued availability of federal student loans.

Private loans are risky and expensive.

• Private loans have high variable interest rates that are dependent on the credit scores of borrowers and co-signers. There is no limit to how high interest rates can rise – they are often two or three times as high as the fixed rate on federal Stafford loans.
• Unlike federal loans, private loans have no real protections for borrowers who fall on hard times. In cases of unemployment, disability, periods of very low income, and even death, private loan borrowers and their families have few or no options for relief.
• The only relief for struggling private loan borrowers actually plunges them deeper into debt. Lenders often charge fees to grant a forbearance – a temporary postponement of payments – on a private loan.

Private loan providers already enjoy powerful government protection.

• Private loans are nearly impossible to discharge in bankruptcy, unlike other similar forms of consumer debt.
• The special treatment of private loans in bankruptcy protects lenders’ investments at the expense of students and consumers. Lenders that are protected against losses in this way will continue to make risky loans to borrowers without strong prospects for repayment – that is bad for students and the economy.

For More Information

Project on Student Debt

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Consumer Protection   ♦