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Home » Federal Aid, Financial Aid News, Student Loans Info

The Fate of Private Student Loans

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I have never hid my opinion from our readers that, if given a choice, federal student loans are far superior to private student loans. Federal student loans have lower interest rates, more favorable terms (such as income-based loan repayment), don’t require a co-signer, and freeze your repayments and interest while you’re in school. All these factors, coupled with the instability of the private loan market starting last fall, make federal student loans a much better option than private student loans for students.

Congress concurs, which is why a House committee recently took up a bill to more closely regulate private student loans within its overhaul of banking regulations. The Consumer Financial Protection Agency Act of 2009 created a new centralized federal agency to oversee various forms of consumer credit, including private student loans, credit cards and mortgages.

Meanwhile, the College Board issued its Trends in Student Aid Report, which shows that the amount of private student loans taken out in 2007-2008 dropped by more than 50 percent from the previous year. In 2009, students privately borrowed $11 billion — representing just 13% of the total student loan market for that year. In 2006-2007, $22.8 billion was borrowed, or 25% of the total market.

Did everyone suddenly realize that federal loans were a better deal? Maybe, but there not necessarily, say the experts. There were a variety of factors that led to the scale-back, including:

  • Tightening up of the financial markets — there are now fewer private lenders, with tighter restrictions on eligible borrowers
  • More families are qualifying for federal student loans now, with so many out-of-work parents
  • Congress increased the federal limits on federal student loans from $23K to $31K for ‘dependent’ undergrads recently — more money to borrow federally, making private loans less necessary

Are you seeing this trend in your family? Do you prefer federal student loans to private student loans?

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