Private Student Loans Compared with Subprime Loans

According to a study conducted by the government, there has been a massive increase in private student loan debt in the last ten years, which resulted to a lot of Americans in trouble of not paying back their loans.

In addition, the study, which was released last Friday, revealed that most private lenders gave loans without thinking whether or not the borrowers would be able to repay, and then resold the loans to investors in order to prevent loss of money.

Those actions are almost related with subprime mortgage lending, which increase the housing bubble and aided in causing the financial crisis in the year 2008.

Arne Duncan, secretary of the Department of Education, conducted the report together with the Consumer Financial Protection Bureau. Duncan said that subprime-style lending went to college and the students at present are paying the price.

Duncan added that the government should do more to guarantee that people who were given the private loans have the same protections with those who received federal government loans.

The study also said that private student loans have a higher risk than federal loans because they are charged with variable interest rates, which can trigger monthly payments to increase all of a sudden. In contrast, federal loans are charged with fixed interest rates.

Moreover, while federal loans can be postponed or reduced if a borrower is not able to repay, private loans do not offer those options.

Most of the times, students are not aware of the difference between federal and private loans which lead them to apply for expensive student loans, even though they were qualified for more affordable and safer government loans.

One feature of a student loan which was emphasized in the study was that it cannot be cancelled by filling for bankruptcy, not like other credit card balances or debt. As a result, a lot of borrowers are either trapped or overdue on loans that lenders are reluctant to alter.

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