Connected? Private Student Loans, For-Profit Schools and the Student Loan Debt Bubble
November 21, 2012

Many have drawn parallels between the current student debt crisis and the mortgage crisis of recent years. Both financial crises are rife with predatory lending practices, plagued by horrendous loan servicing issues and subject to harsh debt collection practices. Notably, the Consumer Financial Protection Bureau’s report from the Student Loan Ombudsman last month provides a lot of information based on consumer feedback about why private student loan servicing issues are, from a numbers perspectives, the most common student loan issue. Earlier this week, Demos, a nonpartisan think tank out of New York, published some interesting information on the ominous student debt bubble. The group does not hesitate to point the finger a little more squarely at Wall Street than others have. Focusing on Wall Street as the manipulator of the situation helps in part to clarify what’s going on.

Who Profits From Private Student Loans

According to analysts at Demos, the forces currently driving the huge growth of private student loan debt are the same ones that drove the mortgage crisis a few years back: the actions of Wall Street. Specifically, the problem is the Street’s desire to invest in consumer debt. To be clear, investing in debt basically means making a profit at the consumer’s expense. Companies can buy your debt from the bank at a very low cost and then collect the full amount from consumers for an excellent profit. In the case of student loans, they’re buying student loan asset backed securities (SLABS).

This appetite for debt on the investor side led private student loan companies to slacken their lending standards, making it much easier to get a private student loan. Prior to the interference from Wall Street, private student loans, like federal student loans, were mostly taken out through financial aid offices on campus. But with such a huge profit to be made, private student loan companies began to aggressively market their product directly to students, increasingly leaving the schools out of it.

Most Private Loans Go To For For-Profit Schools

One highly suspect thing that private student loan companies and for-profit colleges have in common is that their ability to market their product far surpasses the value of that product. Not surprisingly, evidence abounds on how private student loan and for-profit schools are two of the worst investments a student can make. So it also makes a lot of sense that the two often go hand in hand. According to Demos, “in 2008, just 14 percent of all undergrads took out a private loan while 42 percent of students at for-profit colleges took them out.” Another thing private loans and for profits have in common are higher default rates than any other type of loan and any other type of school, proving them further to be a truly a dangerous combination.

It’s important to note too, many analysts believe that despite the similarities between the mortgage crisis and student debt, there are some important differences that might spare the national economy at least some potential trouble. Even so, there is still cause for concern. Thankfully, students have allies who know the system and can help them work it to their advantage. Taking a page out of the book of tycoons on Wall Street, the key for students struggling with debt is good management. Finding an organization that can help optimize student debt will hugely ease the burden of student loans.