Private Student Loans Set to Stage a Major Comeback

Recent governmental analysis has shown that about one-fourth of all federal financial aid is directed toward students who attend private, for-profit colleges, even though these students represent just 12 percent of the national college population.

Private student loans are non-federal loans – student loans issued by banks and private lenders, rather than by the federal government.

Private student loans are credit-based loans carrying variable interest rates that can be as much as three to five times as high as the fixed interest rates on federal college loans. Additionally, private student loans don’t generally offer the flexible repayment options and borrower hardship protections offered by federal education loans.

The recent substantial drop in the amount of private student loans being issued can be partly attributed to greater publicity of the drawbacks of these loans in comparison to federal student loans.

Consumer advocates, student groups, and the U.S. Department of Education have campaigned heavily over the past three years for the benefits of low-cost federal college loans over private loans, which the groups maintain are more expensive and higher risk for vulnerable student borrowers, many of whom are financially inexperienced and who may not be aware of exactly what kind of long-term debt burden they’re signing up for.

Private Student Loans Poised to Surge at For-Profit Colleges The student loan default rate among students from for-profit colleges is exceptionally high because these students – a large proportion of whom are low-income, minorities, or returning students – tend to have a harder time translating their for-profit degree into gainful employment, and they’re carrying much more student loan debt than their post-graduation income will allow them to repay.

New proposed federal financial aid regulations seek to rein in what critics of for-profit colleges see as runaway student debt levels by instituting a loan default threshold that would render a for-profit institution ineligible to offer federal financial aid to its students if its students have a sustained high student loan default rate.

A proposed federal “gainful employment” rule would also yank federal financial aid funds from for-profit schools whose students graduate with excessive debt-to-income levels and are unable, in general, to find work – “gainful employment” – that will allow them to earn enough to pay off their student loans.

But in the absence of federal financial aid, private loans remain the financing of choice among students – particularly in the current economy, with home equity, credit card lines, investments, and college savings largely decimated – and some private lenders are readying to fill in the gaps left by the suspension of federal financial aid at ineligible institutions.

According to analysts, large private student loan lenders like Wells Fargo and Sallie Mae will reap the benefits of the proposed federal financial aid sanctions, which are set to go into effect in 2012.

Lingering Recession Forces Students Toward Pricier Private Student Loans The re-emergence of private student loans won’t be limited to just for-profit colleges, however. The rise, fall, and rise-again of private student loans as a part of U.S. students’ long-term financial aid future is tied directly to increases in the costs of college and the failure of federal financial aid to keep pace with the increases.

“Increases in college costs are the primary drivers of increases in student borrowing, especially when need-based grants don’t keep pace with higher college costs,” Mark Kantrowitz, publisher of FinAid.org, told Reuters.

And as the sour economy drags on, students’ need for funding sources to help pay for college will only become greater.

Publicly funded colleges and universities are reeling from a string of spending reductions for higher education and are passing along those losses to students in the form of tuition and fee increases.

“Private student loan volume could grow in the double digits next year because of tuition hikes driven by state budget constraints,” said Michael Taiano, a financial analyst at Sandler O’Neill.

At the same time, a record number of students are seeking a higher education, enrolling or re-enrolling in colleges and universities, stretching the federal financial aid budget thin.

“Federal budgets are constrained by how much in aid they can deliver,” said FBR Capital Markets analyst Matt Snowling. “So the funding gap is going to be filled by private loans.”

As the lender-in-chief for federal college loans, the federal government is also beginning to experience first-hand the impact of a growing number of loan defaults, as a national populace in the midst of a recession and 10-percent unemployment struggles to keep up with its monthly bills.

Recent graduates are leaving school with record-high debt from loans and diminished prospects for employment. Parents who in other years might have helped their children pay for college are finding themselves being turned down for federal parent loans because they have joined the ranks of the unemployed and don’t qualify for the loans based on their own creditworthiness.

All of these factors are re-opening the door to private loans, despite the federal government’s best efforts to steer families from private student loans to federal financial aid options.

FinAid.org’s Kantrowitz predicts that the volume of private student loans will exceed federal loan volume by 2025. And, as they have in the past, lenders of private loans are perched, ready to fill in the widening gap between the cost of a college education and the value of a federal financial aid package.

Defining the Term Unsecured Loan

Unsecured Loans are a form of financial assistant that can be obtained without being secured by any form of collateral.

For this reason, they are a very popular form of financial assistance. This type of loan is perfect for individuals who do not own their own property as well as for tenants, students and even homeowners who don’t wish to risk their own property.

To qualify for this type of loan, credit checks are made by the financial services to ensure that you are a ‘trustworthy’ investment to the lender. The risk involved to the lender in providing this type of loan is neutralised by significantly increasing the interest rates; it is rare to find a ‘low interest’ unsecured loan. Unsecured Loans are very much a ‘last resort’ option and great if you need the money to fill in the gap of short fiscal need. They also often come under various guises including: ‘Personal Loans’, ‘Tenant Loans’, ‘Pay-Day Loans’ and ‘Car Loans’ to name but a few. This is because unsecured loan payments can be used for almost anything, from unexpected healthcare expenses to paying for that dream holiday or ideal car.

Loans that aren’t secured against property are ideal for those looking for a quick way to obtain capital as payments are usually made on the same day of application. These loans are ideal for those wanting a small loan with a short repayment term. Although, higher loans (over £10,000 for example) can usually be arranged that also have longer repayment terms. With an unsecured loan, the maximum lending amount is typically £25,000 from most UK Lenders. Lenders determine an unsecured loan agreement depending upon the borrower’s personal circumstance and therefore payment breaks can be arranged and repayment terms can be designed around the borrower’s financial need.

As mentioned above, a loan of this type is determined by the consumer’s credit history, which is not so great news for people with bad credit. However, the recent advent of ‘Guarantor Loans’ has made getting an Loan much easier if you have bad credit. Guarantor Loans are a type of unsecured loan which require you to have someone (a family member/friend) to take care of the debt, someone who can help you out if you have trouble paying by taking responsibility of the debt; they guarantee the loan. This type of loan is also ideal for young people and students and it’s rapidly becoming one of the most popular finance products in the market today. For most lenders, the guarantor has to be at least 21 years old, a homeowner and have a decent credit history. Guarantor Loans are ideal for people with bad credit as they are determined solely upon the credit history of the Guarantor, so it is vital to discuss all the relevant details with your chosen Guarantor.

Obtaining this type of loan is still extremely difficult however, especially given the current economic climate, as discussed above, lenders have only recently re-entered the market and are much more wary of who they lend to. Nonetheless, most Lenders can be found online, for example, online Guarantor Loans usually provide loans of around £3000. Although, the increased absence of lenders in the market means it’s all the more important to research all the options available for your circumstances. Lenders recommended by a financial advisor are likely to be much more reliable than some of those found online.

Controversially, recent reports imply that banks in the UK are slyly trying to make more money from customers by increasing their personal loan interest rates. According to these claims, over the last 6 weeks, lenders have increased the average rate of interest charged on their personal loans by 1%. This is surprising with the current base interest rate being at its lowest ever level at 0.5%.

Over one million consumers are said to have opted for an Unsecured Loan last year in a bid to consolidate their outstanding debts. If Personal Loan Interest rates rise any further though, the country could hit further economic turmoil as unsecured loans may become too expensive for the majority of the country. Therefore, it is imperative that you seek professional advice when looking for the right unsecured loan for your circumstances. To be accepted for a most Unsecured Loans you must be a full citizen within the UK and you must be over 18.