Thursday, Feb. 22, 2007 | In his recent letter “Banks Trapping People into Loans,” Ernie Barrera explained the blowback of some home mortgages. Not so well known is a relatively new way to get burned by banks: private education loans.
According to an investment banker quoted in The Economist (“Thanks to the Banks,” 2/18/06), private student loans are likely “the fastest growing segment of consumer finance — and by far the most profitable one.” This quote is cited and expanded upon in a recent Pew Charitable Trusts report (“The Future of Private Loans: Who Is Borrowing and Why,” December 2006).
Private education loans are alluring for a number of reasons — initial in-school rates can be lower than federal loans and students (rather than their parents) can own them. The downside isn’t apparent until after graduation when rates quickly leapfrog 3 percent or more past federal loan rates and the payback period ratchets past 20 years. Worse, these private loans cannot be consolidated later as federal loans at lower rates. Essentially, they ensnare mostly-young graduates with financial servitude from the get-go.
Whether for mortgages or education loans, banks will likely respond “caveat emptor” to any complaints as they pull out reams of legalese that translate roughly to “I told you so.” But without clear, concise and comprehensible loan disclosures, it is nearly impossible for buyers to beware. We need to be telling our stories to regulators and elected representatives.