Private loans can burden U.S. college students

By Kevin Drawbaugh

WASHINGTON (Reuters) - Tyler Adams half-regrets borrowing $60,000 to pay for college -- the half he got, that is, from private loans outside government aid programs.

Adams, a 28-year-old Orlando science teacher, owed $30,000 on federal loans and $30,000 on private loans upon graduating in 2003. Today, he pays 3 percent interest on the federal debt, but 10 percent on his Citibank private loans.

He struggles with the bank's repayment plan, which at first charged $277 a month, rose to $344, and soon will hit $687.

"If I could go back and do things over, I wouldn't do what I did," said Adams, one of millions of young people saddled with high-cost debt from private loans -- the fastest growing form of financial aid for U.S. college students.

The Democratic-controlled U.S. Congress is grappling with the soaring cost of college, looking to make good on a 2006 campaign promise. On Thursday, President George W. Bush signed into law legislation that slashes federal subsidies to lenders and boosts student grant funding.

But Washington has yet to deal conclusively with private loans, say education researchers, analysts and activists.

"Private loans are the fastest growing element of college financing today," says Michael Dannenberg, education policy program director at the New America Foundation.

"What's most disturbing about them is one in five students who take out private loans have not exhausted their access to federal loans ... which are almost always a better deal."

Two-thirds of students get financial aid, which totals about $150 billion a year -- about half of it as loans.

Most student loans are guaranteed or made directly by the federal government. But private loans come straight from banks and other lenders with no federal strings attached.

PRIVATE LOANS GROW

Ten years ago, private loans were virtually unheard of. Today, they account for about 25 percent of all student loans. Some researchers predict private loan volume will exceed subsidized, federally guaranteed loans by 2010.

Private student loans are the fastest growing segment of consumer finance and are "by far more profitable" for banks than auto loans and credit cards, says analyst Matthew Snowling at investment group Friedman Billings Ramsey.

Major private loan groups include Citibank, Sallie Mae, First Marblehead, JPMorgan Chase & Co, Bank of America Corp and many others.

Advocates for the business say private loans help students afford an education by bridging the widening gap between soaring college costs and slower-growing student resources including grants, scholarships and federal loans.