JPMorgan Chase & Co. charges Mirella Tovar as much as 10.25 percent annual interest on her student loans -- a rate as high as a credit card.
The 24-year-old aspiring graphic designer, the first in her family to go to college, is among millions of former students paying off high-interest loans to private lenders, among them JPMorgan, SLM Corp. and Discover Financial Services. In a good month, Tovar earns $730 as a part-time hostess in a pizza parlor, and most of that money goes toward her debt of $98,000.
Unlike the federal student-loan program, which lets consumers borrow at fixed rates directly from the government, these loans from at least 30 banks and other private lenders feature mostly variable rates that can be more than twice what some people pay in the U.S. program. With college costs spiraling, the marketing and interest rates of these loans are drawing increasing complaints from borrowers and regulators, who say teenage consumers often don’t understand their terms.
“It was like signing up for iTunes,” said Austin Bousley, 25, who applied on the Internet for a private loan from SLM, known as Sallie Mae, as a student at Suffolk University in Boston. Some of his loans, which he began taking out in 2006, carried rates as high as 9.25 percent. “The interest is accruing and accruing. I have a feeling I’ll be making payments forever.”
Loans from banks and other private lenders make up about 15 percent of the $1 trillion in outstanding student debt, according to an estimate by Mark Kantrowitz, who runs FinAid.org, a website about college grants and loans. About 2.9 million students have private loans, according to the most recent federal data analyzed by The Institute for College Access and Success, an Oakland, California-based nonprofit group.
Now, with college costs continuing to soar, Discover and SLM are both working to expand their student-loan businesses.
“Student lending is a good investment,” said Carlos Minetti, president of consumer banking and operations at Discover. “It has an attractive customer base that tends to have higher earning potential and lower unemployment over time.”
JPMorgan, the largest U.S. lender by assets, said in April it would stop offering student loans on July 1 except to bank customers. The shrinking private student-loan market and the government’s expansion into originating federal student loans are behind the bank’s decision, Steve O’Halloran, a spokesman, said in an interview.
Private-lending practices are drawing the government’s attention as Congress and the Obama administration look to help students avoid predatory, high-interest loans.
“Like mortgages before the financial crisis, many borrowers took on private student-loan debt with terms and conditions they didn’t fully understand,” said Rohit Chopra, the student-loan ombudsman at the Consumer Financial Protection Bureau, a federal agency studying the private-loan market. Recent graduates “are now fighting to stay afloat because these loans don’t always have the same repayment options as federal student loans,” he said.
To pay for college, students typically rely on fixed-rate government-backed loans, with current interest rates for undergraduates ranging from 3.4 percent to 6.8 percent. These federal loans are capped at $31,000 for a dependent student’s undergraduate career. Parents can also take out federal loans at 7.9 percent up to the cost of attendance less any financial aid.
Beyond that are private loans, which are often used to bridge the gap between the cost of college and what a student can take in federal loans.
Private loans don’t offer students the same protections as federal loans, such as income-based repayment plans and deferment. Unlike federal loans, whose interest rates are set by Congress, private loans aren’t guaranteed by the government.
Private loans can carry higher rates because students often don’t have a credit history.
While lenders charge students high rates, banks such as JPMorgan have been able to borrow from the U.S. Federal Reserve at close to zero percent since December 2008. The central bank, whose target for overnight interbank lending is zero to 0.25 percent, has said economic conditions will probably warrant keeping it low through at least 2014.
The average rate for a 30-year home mortgage dropped to 3.75 percent last week from 4.55 percent a year earlier, according to mortgage finance company Freddie Mac. Yesterday, the U.S. 30-year bond yielded 2.57 percent.
Much of the outstanding private student debt was amassed before 2008 when credit standards were less stringent and lenders targeted the education market often through direct marketing to students.
Private loans to students peaked at $22 billion in the 2007-2008 school year, according to data collected by the College Board, a New York-based nonprofit group. At the time, about 14 percent of undergraduates took private loans, according to a 2010 report from the U.S. Government Accountability Office. Annual lending dropped to about $6 billion in 2010-2011 as lending standards tightened and federal loan limits increased.
More than two-thirds of borrowers with private loans who took part in an online survey said they didn’t understand the main differences between private and government loans. About 6,650 borrowers responded to the questionnaire from Young Invincibles, a nonprofit group in Washington that focuses on issues facing 18-to-34 year-olds.
Students are making decisions about private loans “when they’re 19, 20, 21 years of age, which will haunt them for a lifetime,” Senator Richard Durbin of Illinois said in a telephone interview.
A bill introduced by Durbin and fellow Democrat, Iowa Senator Tom Harkin, in March would require colleges to counsel students about taking out the maximum in federal loans before venturing into the private market.
Tovar, the aspiring graphic designer, would have welcomed such information. She said she didn’t know the difference between private and federal loans in 2006, when she enrolled at Columbia College Chicago, a private, nonprofit school specializing in art and media.
“I thought that was going to be the best option,” said Tovar, who was also unaware that her loans didn’t carry a fixed rate. “The school never sat down with me and had meetings about payments or loans.”
Steve Kauffman, a spokesman for Columbia College Chicago, declined to comment.
Tovar, who lives with her parents in the Chicago suburb of Blue Island, owes $55,600 to Chase Student Loans, a unit of JPMorgan, according to a May 17 statement provided by her. A loan for $24,794 carries an interest rate of 10.25 percent, as does a second loan for more than $2,619. A third for $28,187 has a rate of 8.97 percent. She has a balance of $42,326 in loans from a different lender.
While her parents have helped with her payments, it wasn’t enough to avoid default on some loans. Tovar said she contacted Chase and the bank told her they couldn’t negotiate. American Education Services, which services some of her loans told her she could defer payment for one month, Tovar said.
“We continue to encourage customers to contact us if they have questions about paying back their loans,” O’Halloran, the Chase spokesman, said in an e-mail. He declined to comment on the interest rates the bank charges for student loans.
Bousley, who was 18 when he applied for his first student loan from Sallie Mae, also said he didn’t know the difference between a private loan and a federal loan.
“If it said ‘student loan,’ I assumed it was all the same stuff,” Bousley said. The cost to attend the New England School of Art and Design at Suffolk University was about $37,000 his freshman year, according to the college.
Bousley said he asked for more financial aid his senior year. The school told him he would need to take out more loans or he would be unable to continue his studies there, he said. Also that year, Sallie Mae required a co-signer on his loan, he said.
Suffolk has “historically and consistently” encouraged students to utilize federal loan programs before taking out private loans, Greg Gatlin, a spokesman for the school, said in an e-mail. He said the campus counsels students about options available to finance their education.
Bousley said he borrowed $83,000 in private loans from Sallie Mae. Today, the balance is more than $116,000 because of accrued interest and missed payments, he said. He had been making interest-only payments of $250 to $275 a month on just two of his eight loans.
Sallie Mae will adjust the terms of private loans for certain customers when it determines the changes may increase a customer’s ability to make payments, according to the company. Options can include reduced payment plans, lower rates or extended terms and temporary suspension of the requirement to make payments, the company said.
After Bousley said he approached the lender, Sallie Mae reduced the rate on all of his loans last month to 6 percent and extended the terms, according to the company. He now pays about $860 monthly, it said. He needs to keep up the payments for 15 months to maintain the lower rates moving forward.
Bousley, who now makes $65,000 a year, said his indebtedness continues to dent his lifestyle. He was turned down as a tenant by five Boston rental apartments last year, he said. His sixth attempt, for a studio-sized apartment, was successful only after his girlfriend’s father agreed to co-sign the lease.
Students are relying on private loans as the cost of tuition rises faster than the pace of inflation. Average tuition and fees to attend a public, four-year college were $8,244 this past year, almost triple the $2,811 in 1995-1996. They have more than doubled to $28,500 from $12,216 at private schools, according to data from the College Board. The figures exclude room, board and other costs.
Sallie Mae, based in Newark, Delaware, is trying to increase its lending to students. The company’s private-loan portfolio was $37 billion in the first quarter, about the same level as in 2009. While the company said in April that it expects to write $3.2 billion in private loans this year, that is down from $7.92 billion in 2007.
Today, 88 percent of Sallie Mae’s outstanding private loans carry rates below 10 percent, while half are less than 6.75 percent, according to the company.
Sallie Mae works with customers to help them navigate the loan process, said Patricia Nash Christel, a spokeswoman for Sallie Mae.
“Rates are disclosed multiple times during the application process,” Christel said. “We incent customers to make small payments while in school by offering rate reductions -- and in the process save money over the life of the loan.”
Last month, the company said it planned to offer its first fixed-rate student loans with interest rates ranging from 5.75 percent to 12.875 percent.
Discover, based in Riverwoods, Illinois, bought Citigroup Inc.’s private student-lending business in 2010 and $4.2 billion of the bank’s private student loans. It purchased an additional $2.5 billion of loans in 2011.
Discover said last month it would offer a fixed-rate, private student loan with interest rates from 6.79 percent to 9.99 percent, depending on the borrower’s creditworthiness and if there is a co-signer, said Jon Drummond, a spokesman.
Tovar, the pizza parlor hostess, said when she talks to young coworkers planning to attend college, she advises them to seek federal student loans first.
“I tell them to take private loans as a last resort,” she said. “I wish someone would have told me that.”