How private lenders have left millions of college students with no hope for the future

Jones figured if she worked hard and kept up with her payments, she would eventually be free of the financial burden. But after 10 years of consistent payments, she's still stuck with her debt, and it has actually grown — up to $57,000.

She and her twin brother were first-generation college students, so the complexities of financial aid were foreign to their family. When they maxed out on the federal aid the government would give them, they turned to the private student-loan industry to complete their degrees. And that's when the real trouble began.

Jones graduated with an initial $11,000 balance in private loans — which seemed manageable compared with her federal debt load of $31,000. But while she's seen the federal balance decline slightly, her private balance has ballooned to $27,000 — despite the $500 a month she paid toward the loan for a period of time. The issue, Jones told me, is the 17.5% interest rate on the loans, which is nearly three times the rate on her federal loan. This astronomically high rate has made it impossible for her to make headway on the private part of her debt: She has accrued $42,000 in interest since she graduated. Jones has gotten some relief in the past few years with the federal student-loan payment pause, but she's worried that she'll fall even further behind on her private loans when those payments restart.

"We're struggling right now, especially with inflation," she said of her and her brother. "I mean, a gallon of milk is astronomical right now. Both of us work different jobs to make money on the side. We both do DoorDash, and probably when those federal student loans start up, it'll be more of a necessity to do that."

While private debt makes up just about 10% of the $1.7 trillion student-debt mountain in the US — about $136 billion — the industry has exploded over the past decade: the amount of outstanding private debt has jumped an estimated 47% since 2014. And while data on the exact number of borrowers is difficult to come by, experts estimate as many as 6.4 million Americans could hold private loans. Despite the political furor over student-loan forgiveness, private-loan holders are not only left out of the federal-relief conversation but also forced to navigate a hard-to-regulate industry that sometimes leaves borrowers with predatory loan terms they can't escape. For Jones, the crushing weight of her loan has forced her to pick up side jobs and try to pay it off as fast as she can — a desperate race against the ever-soaring interest payments.

"It's not like we're trying to just have a debt wiped off," she said. "We are paying what we owe, but we're not fine with paying five times what we borrowed."

'A Wild West for students'

Private student loans have been around for decades, but since the Federal Direct Loan Program began in 1992, many student-loan borrowers have been able to obtain funds directly from the government. The federal loan program offered lower interest rates and standardized terms, which was immediately appealing to borrowers. But surging tuition costs and the shrinking amount of nonloan financial aid available to students have helped fuel the recent demand for private loans. In most cases, the Institute for College Access & Success' senior director of college affordability, Michele Shepard, told me, students take on private debt when they've tapped out the maximum amount of federal loans they can hold — $5,500 for a first-year student who is a tax dependent or $9,500 for independent students. Though that number rises for each year of education, it's often not enough.

"They just don't have the money out of pocket to cover their costs even after they've taken out all their federal loans," Shepard said. "And so that's often where you see someone will say, 'I need to find a way to get that extra money,' and they will turn to the private market."

When students turn to the private market, they find a litany of lenders willing to help fund their education dreams. But despite lofty promises from private lenders, Shepard told me it's all about making a profit.

Suzanne Martindale, the senior deputy commissioner for consumer protection at California's Department of Financial Protection and Innovation, told me that the issue with borrowers seeking out private lenders was "that there has not been a ton of federal oversight. She added: "And there really isn't much by way of federal regulation to govern those kinds of products and services." The ability for private lenders to have the freedom largely to set their own terms, Shepard said, has turned the market into "a Wild West for students."

The variability with interest rates plays a large role in the "Wild West" setting. While interest rates on federal loans are fixed — meaning the rate that is set when a borrower takes out the loan will stay the same for the lifetime of the loan — some private student loans are variable, meaning the rate can increase or decrease as a borrower pays it off and lenders can set their own rates. With situations like Jones', when the rate is in the double digits, it can be hard to stay ahead of the mounting interest.

"In some cases, the loans are so expensive that they are destined to fail. In other cases, borrowers ran into unexpected life traumas such as disabilities or divorces that ruin their dreams of upward mobility," the National Consumer Law Center wrote in a 2008 paper. "Regardless, the student loan debt that was supposed to be an investment in their futures is dragging them down."

A predatory lending trap

In between study sessions, exams, and campus parties, deciphering complex student-loan terms has become a standard part of students' higher-education experience. To improve their life prospects, 18- and 19-year-olds are expected to comb through pages of virtual paperwork and go "interest-rate shopping" to see which lender has the best terms. And complex terms can end up getting these students — and their families — in a financial bind.

One of the more common and innocuous-sounding actions a borrower might take is bringing on a cosigner, Anna Anderson, a staff attorney with the National Consumer Law Center focusing primarily on student-loan issues, told me. While cosigners are necessary to help out borrowers who may not be able to afford the terms of their loan on their own, the agreement can end up leaving the cosigner in a hole that's tricky to escape.

"Someone who is just looking to help their loved one get the education that they think they deserve, those folks, when they sign up for these loans, they don't always understand the financial consequences and risks that come with these and how difficult it is to you remove yourself from that loan once you've agreed to be a cosigner," she said.

And once borrowers sign on the dotted line, they open themselves up to aggressive debt collection and misleading behavior, such as communications from the lenders that do not clearly disclose the terms of the loan. These tactics have started attracting the attention of federal and state regulators. For example, in January 2022, 39 state attorneys general announced they had reached a $1.85 billion settlement with Navient — a major servicer of private loans — over allegations of "widespread unfair, deceptive, and abusive student loan servicing practices," the press release said. They accused the company of offering private student loans to borrowers who went to for-profit schools regardless of their abilities to pay the loans back. Navient denied any wrongdoing.

An official from the Consumer Financial Protection Bureau told me that private-loan originators, servicers, and collectors remained subject to a number of federal laws, including the Truth in Lending Act, that were designed to protect consumers from predatory behavior. And Martindale said the people targeted by predatory behavior were often "folks who don't have a lot of resources, maybe working a low-wage job and trying to better themselves and their future." Martindale added: "It's going to be the low-income and more vulnerable populations that often get really aggressively targeted for these programs."

No federal benefits for private borrowers

In addition to being subjected to the sales tactics and pernicious whims of their private lender, once a borrower enters business with a private lender, they immediately lose the hope of getting any relief from the federal government. Ryan Moran, a nurse at an intensive-care unit in Florida, has about $75,000 in private student debt, along with a $38,000 federal balance. He wanted to further his education by going to grad school and hopefully boost his salary, but his private lender would not defer payments while he was in school — as federal loans allow a student to do — making the option unaffordable.

"It's put my life on pause for multiple years now," Moran said. "And it's kind of the push and pull between making the minimum payment for 20, 25 years and paying all that interest or just working overtime every week for five years to pay everything off and putting my entire life on hold."

Moran isn't alone. While President Joe Biden pushed through targeted relief for thousands of federal borrowers in the past year, he does not have the jurisdiction to offer relief programs to people with private lenders. That means private borrowers didn't benefit from the student-loan-payment pause that began in March 2020 — and they wouldn't have been included in Biden's plan to cancel up to $20,000 in student debt per borrower had the Supreme Court upheld it.

And now that federal student-loan payments are resuming in October after an almost four-year pause, it's even more pressing that borrowers know exactly what they could miss out on by shifting to private loans. Many lenders are taking advantage of this moment to offer people with federal loans refinancing services — which allows a borrower to move their loans to a new lender under different terms. Refinancing companies typically emphasize the monthly savings a borrower could receive by shifting to a new, lower-interest rate. But if a borrower with federal student loans refinances to a private lender, it will strip them of all of their federal benefits, including forgiveness and repayment plans.

Shepard said refinancing could bring some benefits to borrowers, but for others, refinancing can be a trap. "What concerns me is that most people are put in a position where they don't really have a lot of other choices," she told me. Anderson of the National Consumer Law Center said she's "really concerned about refinancing."

To be sure, some private servicers do disclose benefits private borrowers could lose should they choose to refinance. Navient, for example, has a disclosure on its website that says refinancing a federal student loan "means you will no longer have access to federal loan benefits" or "any other relief measures."

SoFi, another refinancing company, sent letters in the mail to borrowers with the header: "Federal student loan forbearance is ending soon. Don't miss out on savings — start planning your refi today." Inside the mailer, there was a disclosure saying that borrowers should "still consider" Biden's plans for federal debt relief but "should also take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment."

Hopes for regulation

While federal lenders answer to the government, the best oversight for private lenders at the moment are complaints submitted to the Consumer Financial Protection Bureau, which can then investigate and fine lending firms. However, since the actions are confidential, the general public may not even realize a lender has been sanctioned. And despite the agency having a lot of responsibility, funding for the CFPB is "continuously starved," Shepard said.

Still, some federal lawmakers have been working to expand relief for private borrowers. In January, Rep. Steve Cohen led the reintroduction of the Private Student Loan Bankruptcy Fairness Act, which would allow private student debt to be discharged in bankruptcy — a standard that existed before a 2005 change in the law. Some states are also taking up the fight. Martindale of California's Department of Financial Protection said: "We're doing our part here in California to clarify how our laws apply to these kinds of private entities." And some state governments have established a "bill of rights" for borrowers — Maryland, for example, outlined a list of protections at the end of 2022 that said borrowers "may not be subjected to conduct that is intended to mislead you or otherwise treat you in an unfair, abusive or deceptive way."

Moran said he didn't regret taking out private student loans because it allowed him to pursue his desired nursing career. But he wishes turning to a private lender didn't come with such a high cost.

"My past couple of years have been paying down as much as I can and not really having any savings to show for it, despite having a decent-paying job. It's kind of impossible to get ahead right now," he said. "The prospect of ownership of a house is so unattainable at the moment it's almost laughable. Since I started college, I've just had this black cloud looming over me knowing I would have to pay off this debt eventually."

Ayelet Sheffey is a senior economic policy reporter covering student debt on Insider's economy team.