Former students pay for accepting exploitive loans

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, Calif.-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.
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.
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 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,” Sen. Richard Durbin of Illinois said in a telephone interview. &#8226

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