by Marian Wang, ProPublica.
Much like the mortgage market, the market for private student loans has gone through a big boom and a messy bust. Some banks and lenders played fast and loose with student loans, aggressively marketing them to borrowers who couldn’t afford that amount of debt, according to a new government report.
“Borrowers who took out loans at the height of the boom are still suffering from those excesses,” said Consumer Financial Protection Bureau Director Richard Cordray in remarks to reporters on Thursday. The report, released jointly by the U.S. Department of Education and the CFPB, is the government’s first major study of the murky private student loan market, for which there has long been little regulation or reliable data.
American borrowers currently owe more than $150 billion in private student loans, according to the report. Default rates soared in the years since the financial crisis, and more than $8 billion in private loans are in default.
In the run-up to the financial crisis in 2008, the boom in risky private student loans was fueled by Wall Street investors’ demand for securities backed by bundles of student loans, the report said. See this graph, which draws from proprietary loan data collected from major lenders:
After the crisis, investor interest in all manner of loan-backed securities — including student-loan-backed securities — collapsed. And with less packaging and reselling of loans to fund the creation of new loans, the private student loan market has since dialed back and raised its lending criteria.
The result: private loans are now much harder for borrowers to get.
According to the report, more than 90 percent of the dollar amount of private student loans originated last year were co-signed — so if the primary borrower is unable to repay the loan, the cosigner will also be responsible for payment. That’s up from 55 percent in 2005.
Much of what the report describes — private student loans originated by financial firms often for immediate sale and securitization — is helpful context for understanding the quandary of many borrowers and their cosigners.
Copyright 2012 The National Memo