As in the housing market, securitization of student loans led to more aggressive underwriting for borrowers who could not possibly afford the debt they took on, according to a government report.
The 131-page report was formally released by the Education Departmentand the Consumer Financial Protection Bureau on Friday. It provides new estimates for total outstanding student loan debt: more than $1 trillion in 2011, composed of $864 billion in federal government loans and $150 billion in private student loan debt.
Cumulative defaults on private student loans exceeded $8 billion, a sum from over 850,000 distinct loans.
That total has risen in the last decade as lenders bypassed college financial aid offices and marketed loans directly to students. Students often signed on without realizing the difference between private and government loans or that government loans usually offered better terms, the report says.
Private student loans, for example, usually charge
In addition, many lenders lowered their underwriting standards so that they could originate and then sell off more loans, even if the loans were based on terms the borrowers could not possibly fulfill. Defaults became even more inevitable after the recession slashed graduates’ job possibilities.
“Subprime-style lending went to college and now students are paying the price,” the education secretary, Arne Duncan, said. “We still have some work to do to ensure that students who take out private student loans have the same kinds of protections offered by federal loans. In the meantime, if you have to take out a loan to pay for college, federal student aid should be your first option.”
In a conference call with reporters on Thursday, Mr. Duncan and Richard Cordray, the director of the Consumer Financial Protection Bureau, described ways in which private lenders might have misled borrowers or failed to be entirely transparent about their borrowing terms.
The government officials said they are not currently pursuing action against lenders for these past lending practices, but are monitoring the market now under authority granted by the Dodd-Frankfinancial regulation legislation. They have also urged Congress to reconsider the treatment of private loans in bankruptcies and to require more disclosure in the loan application process.
Private lenders have already tightened their credit standards after the torrent of defaultsin several ways, like requiring student loans to be co-signed. In 2008, 67 percent of private student loans were co-signed; as of 2011, more than 90 percent were.
Mr. Duncan also offered a checklist of tasks that students should complete to make more conscientious decisions about financing college.
These include applying to more than one school and filling out a financial aid form for each school. The vast majority of students who fill out federal student financial aid forms do so for only one school, he said, and so do not have an opportunity to compare the value they could get from different schools.