Pricey student loans sow seeds of trouble

The question is whether everyone who borrowed will be able to repay. Experts don’t track default rates on private student loans, but many predict sharp increases in years to come.

Dr. Paul-Henry Zottola, a 35-year-old periodontist in Rocky Hill, Conn., faces paying $1,600 a month on his student loan on top of a $2,300 mortgage payment and $1,500 on the loan he took out to start his practice.

His credit record remains solid but he owes more than $300,000 in student loans as he and his wife, Heather, an elementary school administrator, raise two young children.

“It would be very easy to feel crushed by it,” Zottola said in an interview. “All my income for the next 10 years is spoken for.”

Meanwhile, complaints about marketing of private loans — like ads promising to approve loans worth $50,000 in just minutes — are on the rise. The complaints have made their way to lawmakers, who see a need to regulate the highly profitable and diverse group of companies and the loans they make to college students.

In August, the Senate Banking Committee approved a bill that would mandate clearer disclosure of rates and terms on private student loans. The bill also would require a 30-day comparison shopping period after loan approval, during which time the offer terms could not be altered.

New York Attorney General Andrew Cuomo said many graduates who borrowed owe as much if not more than most homeowners owe on mortgages. Unlike mortgages with clear consumer disclosure requirements — even from nonbank lenders, private lending is “the Wild West of the student loan industry,” he said in a telephone interview.

Critics say what happened in the mortgage market could happen in the student loan market. Cuomo, who conducted a nationwide investigation, said the parallels between the two markets are “provocative.”

Demand for bundled student loans sold to institutional investors worldwide fueled lending to students. The market for private student loan-backed securities leapt 76 percent last year, to $16.6 billion, from $9.4 billion in 2005, according to Moody’s Investors Service.

The student loan-backed securities market has yet to suffer noticeable effects of a global credit squeeze that was triggered this summer by a mortgage meltdown of borrowers with risky credit.

“Once the economy starts to slow, you’re going to see a large increase of these people in bankruptcy court,” said Robert Manning, a professor at Rochester Institute of Technology who has written about college students and credit cards.

A 2005 change to bankruptcy law puts private student loans on par with child support and alimony payments: Lenders can garnish wages if someone doesn’t pay.

Cuomo’s probe revealed what he calls an “appalling pattern of favoritism” for student lenders that provided kickbacks, revenue-sharing plans and trips to college administrators in exchange for recommended lender status. Other critics allege widespread corrupt arrangements propelled a student loan boom.

Lenders deny such charges, arguing that industry growth resulted from surging education costs and that higher interest rates are justified for unsecured loans to borrowers with blemished or insufficient credit records.

“Lenders take 100 percent of the repayment risk on flexible private-education loans made to people with limited credit histories, on which they will not get repaid for several years,” Barry Goulding, a Sallie Mae official, told Congress last spring.

New regulations could dry up access to education financing, he and other industry executives argue. Some experts are skeptical, predicting waves of student loan delinquencies and defaults on what is outstanding.

“Should private student loans suffer the same sort of failure as (subprime) mortgages, as students graduate or drop out and find themselves unable to pay, we will do serious damage not only to the lives of many students but also to the economic and social fabric of our country that depends on college graduates for its strength,” said Luke Swarthout at the U.S. Public Interest Research Group.

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