Last October, President Obama announced a broad initiative to provide relief for college graduates struggling to repay student loans. In a speech at the University of Colorado in Denver, Obama said the plan will lower monthly payments for 1.6 million borrowers.
Robert Deutsch, USA TODAY
Jessica Fernandez, with daughter Isabella, has more than $35,000 in private student loans. Paying them back became a major issue when she was laid off two years ago.
Robert Deutsch, USA TODAY
Jessica Fernandez, with daughter Isabella, has more than $35,000 in private student loans. Paying them back became a major issue when she was laid off two years ago.
Jessica Fernandez won't be one of them.
Fernandez, 29, of Bridgewater, N.J., was laid off from her full-time job two years ago. She only recently found a job with a temp agency that pays less than half what she had been earning. She and her 8-year-old daughter had to move in with her parents because she could no longer pay the bills, which include student loan payments of more than $1,000 a month.
That would appear to make Fernandez a prime candidate for the president's loan relief program. However, more than $35,000 of her student loans are private. Those loans, which aren't issued or guaranteed by the federal government, have few of the protections provided for borrowers with federal student loans.
The sluggish economy has made the differences between federal and private loans even more pronounced.
For example, federal student loan borrowers who are unemployed are entitled to defer payments on their loans for up to three years. Borrowers earning less than they had been expected to can apply for a reduction in payments, based on their discretionary income. After 25 years of making qualified income-based repayments, the balance of the loan is forgiven, even if it hasn't been fully paid off.
The Obama administration's plan would forgive the loan balance after 20 years.
For private lenders, such relief is voluntary — and rare, says Deanne Loonin, director of the National Consumer Law Center's Student Loan Borrower Assistance Project.
Loonin says she's tried to negotiate with lenders on behalf of low-income borrowers who are unlikely to ever repay their loans, with little success.
"We're almost never able to get any type of workout or modification or anything more than some very short-term payment relief," she says.
Shannon Doyle, a credit counselor for Lutheran Social Service of Minnesota, has experienced similar problems with clients who have private student loans. "It's so frustrating, because they're really at the mercy of the lender," she says.
Private and federal student loans are identical in one important respect: Both are nearly impossible to discharge in bankruptcy.
Loonin says this treatment of private student loans, which doesn't extend to any other kind of consumer debt, gives private lenders little incentive to negotiate with borrowers having trouble repaying their loans.
Fernandez's loans were issued by Sallie Mae, the nation's largest issuer of private student loans. For privacy reasons, Sallie Mae was unable to comment on Fernandez's specific situation.
But spokeswoman Martha Holler says the company recognizes that finding a job today takes longer than it did in the past, and says Sallie Mae offers a variety of modification options for borrowers experiencing financial difficulties.
"We invest in students who invest in their futures, and the vast majority are successful," she says. Sallie Mae's default rate is 3.7%, down from 5.4% a year ago, she says.
Private loan confusion
As the cost of college has outpaced increases in federal aid, the volume of private loans has soared, according to a recent analysis by the Project on Student Debt.
The percentage of undergraduates with private student loans rose from 5% in 2003-04 to 14% in 2007-08. During that same period, the volume of private student loans rose from $6.5 billion to $17.1 billion, according to the report.
Financial aid administrators encourage borrowers to turn to private student loans only after they've exhausted all other sources of college funding. Even private lenders promote this strategy: Sallie Mae encourages borrowers to max out on financial aid and federal student loans before applying for a private loan.
Nonetheless, a large percentage of private loan borrowers don't take full advantage of federal student loans, says Pauline Abernathy, vice president of the Institute for College Access and Success, which oversees the Project on Student Debt. In their analysis, more than half of private loan borrowers failed to max out on federal student loans, and a quarter didn't take out any federal loans.
A growing market
Student loan advocates fear that the volume of private student loans will increase in the next few months, despite widespread efforts to warn borrowers about the risks. Why they're concerned:
•Thousands of low-income students could lose their federal grants. The fiscal 2012 federal budget approved by Congress last month preserves the maximum Pell grant at $5,550, but limits eligibility for Pell grants to 12 semesters, down from 18. It also reduces the family income threshold for the maximum grant to $23,000 from $30,000. Education advocates estimate the changes will affect more than 140,000 students. The Pell grant is the largest source of federal financial aid for low-income students.
Students who receive Pell grants are already more likely to borrow than students who don't receive the grants, Abernathy says. Cuts in Pell grants could force them to borrow even more.
•Record low interest rates make private loans look more attractive than federal student loans. Interest rates for most private student loans are variable and tied to market rates. Because overall interest rates are at record lows, some private student loans have introductory rates of 3% or less. That's considerably lower than the 6.8% rate for unsubsidized federal Stafford loans, which are available to all full-time students, regardless of income.
Legislation enacted in 2007 reduced the rate for subsidized Stafford loans, which are available for students who can demonstrate economic need. However, the interest rate reduction expires this year, and on July 1, the rate for new subsidized Stafford loans will jump from 3.4% to 6.8%, Abernathy says. The change won't affect the rate for outstanding subsidized loans.
Abernathy fears that the increase in interest rates for new subsidized Stafford loans will cause some borrowers to assume that private loans are more affordable.
But because most of the lowest private loan rates are variable, they could jump if overall rates increase. Rates for federal student loans are fixed for the life of the loan.
In addition, most college students won't qualify for the lowest rates unless they have a co-signer with good credit. If the borrower falls behind on payments or defaults, the co-signer is liable for the unpaid balance.
Jessica Fernandez says she didn't understand the ramifications of asking her mother to co-sign when she applied for a private loan to attend a for-profit business school. If someone had explained it to her, she says, she would have attended a less-costly community college or worked her way through school. Fernandez has been told by Sallie Mae that if she doesn't come up with the money to repay her loans, the lender will take action against her mother to collect the debt.
Sallie Mae's website states that borrowers with little or no credit history can realize "substantial savings" by having a co-signer. The website also notes that a co-signer is "equally responsible for the loan obligation."
•Misinformation about private student loans persists. Some borrowers believe they don't qualify for federal student loans because their family income is too high, Abernathy says. In fact, all full-time college students qualify for unsubsidized Stafford loans, regardless of income. Others are reluctant to apply because they believe the application process is long and complicated, she says.
Still others are confused by marketing pitches, Abernathy says. If a borrower types "student loans" into an Internet search engine, she notes, several ads for private loans will appear before the Department of Education's website for federal student loans.
Advocates for student borrowers hope the Consumer Financial Protection Bureau, a consumer protection agency created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, will help alleviate some of the confusion. Last week, President Obama appointed former Ohio attorney general Richard Cordray as the agency's director, using a recess appointment to bypass Republican opposition. Republicans have contested the appointment, arguing that Congress wasn't in recess at the time.
In a Jan. 5 speech before the Brookings Institution, Cordray said his appointment will enable the agency to regulate financial products that have escaped federal oversight, including private student lenders.
The CFPB is currently seeking public comments on, among other things, information available to borrowers who are in the market for a private loan.
"The private student loan market is one of the least understood consumer credit markets," Raj Date, special adviser to the secretary of the Treasury on the CFPB, said in a statement last year.
"It has been operating in the shadows for too long."
Fernandez hasn't given up hope for a better future for herself and her daughter. She's optimistic that her current temp job will turn into a permanent position. She's also trying to create a TV series to shed light on the challenges facing single parents.
But as far as her student loans are concerned, she doesn't see any end in sight.
"The reality is, unless I miraculously find a job in the six figures or marry rich, or I win the lottery, or my show project takes off, I don't see how I'm going to be able to pay off my student loan," she says.
"I'm pretty much going to be attached to this for the rest of my life."
