Private college loans gain popularity |
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George Pappas, senior vice president of strategic
partnerships at EduCap, says the company "categorically disagrees
with the characterization of the (USSA) letter.
"We encourage students to avail themselves of
any federal aid they can get," he says.
"We don't need to mischaracterize the products
they can get. We know that at the end of day, based on the level
of aid available and the schools they're going to, they will need
our help. And we're here to give it to them."
Deciphering
the ads and loan agreements
Whether it's due to murky advertising or other factors, "It's
very clear students are taking out loans and they didn't realize
what they were getting into," says Baum from the College Board.
Take Nick Keith. He borrowed $46,000 for cooking college,
originally paying 9 percent on his loans. Pricey, but Keith assumed
he'd lower the rate in the future when he established better credit.
Meanwhile, he did quick computations and figured that at 9 percent,
loans would cost $500 a month.
"I asked the financial aid adviser if it was
$500 a month and she said, 'That sounds about right,'" says
Keith. "Everything was fine until three months before graduation,
when I got a letter saying my first payment would be due and it'd
be $1,100. I nearly passed out."
Much to his surprise, Keith's interest rates had climbed,
and now stand at just over 18 percent. That's partly because when
he borrowed the money in 2004, the prime rate -- used to set his
loan -- was at a low of 4.25 percent. Today it's 8.25 percent, which
has driven up his costs.
But the margin also appears to have expanded.
For example, lenders may advertise their rates as follows: "an average of
prime plus 3.6 percent to prime plus 7.85 percent, depending on credit history."
Keith's not sure why his interest rate jumped to its current
level. He doesn't remember agreeing to pay 9-plus percentage points above the
prime rate. Other than looking for a good job to cover the tab, he has no idea
how he'll pay off his debt since he hasn't been allowed to refinance as he had
hoped. Stuck, he's suspended payments with a forbearance and admits he's panicked
about the future.
"The worst-case scenario is they garnish my wages
and they take up to 10 percent of my income. Looking at what I make
now," he adds with a rueful laugh, "that would be about
one-fifth of what they're asking for now, so it sounds pretty good
to me."
College financial aid offices:
What are their roles?
Most students turn to college
financial aid officers for help. But they may not get adequate guidance. Keith,
for example, wasn't told he might be unable to slash rates as he'd planned. Instead,
he was given a list of "preferred lenders" who could provide money.
That's standard practice at universities and colleges. Yet it's unclear what makes
a lender deserve special recommendations from a college. | 
