By Kevin Drawbaugh
WASHINGTON | Thu Sep 27, 2007 3:16pm EDT
WASHINGTON (Reuters) - Tyler Adams half-regrets borrowing $60,000 to pay for college -- the half he got, that is, from private loans outside government aid programs.
Adams, a 28-year-old Orlando science teacher, owed $30,000 on federal loans and $30,000 on private loans upon graduating in 2003. Today, he pays 3 percent interest on the federal debt, but 10 percent on his Citibank private loans.
He struggles with the bank's repayment plan, which at first charged $277 a month, rose to $344, and soon will hit $687.
"If I could go back and do things over, I wouldn't do what I did," said Adams, one of millions of young people saddled with high-cost debt from private loans -- the fastest growing form of financial aid for U.S. college students.
The Democratic-controlled U.S. Congress is grappling with the soaring cost of college, looking to make good on a 2006 campaign promise. On Thursday, President George W. Bush signed into law legislation that slashes federal subsidies to lenders and boosts student grant funding.
But Washington has yet to deal conclusively with private loans, say education researchers, analysts and activists.
"Private loans are the fastest growing element of college financing today," says Michael Dannenberg, education policy program director at the New America Foundation.
"What's most disturbing about them is one in five students who take out private loans have not exhausted their access to federal loans ... which are almost always a better deal."
Two-thirds of students get financial aid, which totals about $150 billion a year -- about half of it as loans.
Most student loans are guaranteed or made directly by the federal government. But private loans come straight from banks and other lenders with no federal strings attached.
PRIVATE LOANS GROW
Ten years ago, private loans were virtually unheard of. Today, they account for about 25 percent of all student loans. Some researchers predict private loan volume will exceed subsidized, federally guaranteed loans by 2010.
Private student loans are the fastest growing segment of consumer finance and are "by far more profitable" for banks than auto loans and credit cards, says analyst Matthew Snowling at investment group Friedman Billings Ramsey.
Major private loan groups include Citibank, Sallie Mae, First Marblehead, JPMorgan Chase & Co, Bank of America Corp and many others.
Advocates for the business say private loans help students afford an education by bridging the widening gap between soaring college costs and slower-growing student resources including grants, scholarships and federal loans.
But private loans may impose up-front fees equal to 10 percent of the loan and interest rates as high as 18 percent, while federal loans are capped at 6.8 percent, soon to go even lower thanks to the new law.
Private loans get backward one of the main tenets of student aid from President Lyndon Johnson's Great Society program, says Luke Swarthout, a student advocate at U.S. PIRG, a federation of public interest groups..
"Our federal student aid system is supposed to help low-income students go to college. We target the greatest aid to those with the greatest need. But credit-based private loans offer the smallest loans with the worst terms to the students with the greatest need," Swarthout says.
"It's more expensive, the terms are worse, defaults are higher and it's regressive."
HARD SELL SEEN
Private loans are typically less forgiving and harder for students to understand, says Sandy Baum, professor of economics at Skidmore College and policy analyst at The College Board, an education testing and research group.
"Government has to think about ways to diminish the amount of abuse that goes on ... The marketing is so unbelievably aggressive and frequently misleading," says Baum, who calls another piece of legislation pending in the Senate "a step in the right direction."
On August 1, the Senate Banking committee approved a bill to crack down on private loan marketing, banning cozy practices and kickback schemes unearthed earlier this year across the student loan industry by government investigators.
The measure is backed by Sen. Christopher Dodd, a Connecticut Democrat and presidential candidate. Like similar legislation applying to the marketing of federal loans that has not been finalized, the outlook for further congressional action is uncertain.
(Reporting by Kevin Drawbaugh, editing by Tim Dobbyn)
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