NCPA - National Center for Policy Analysis

Private Loans to Students up Last Year

March 4, 2014

Private lending to students increased 8.1 percent last year from the previous year, says the Wall Street Journal.

Banks and lenders are turning to students for business. With the employment picture improving new graduates can more easily find jobs, which makes lenders more comfortable in dealing with them. Similarly, banks see students with high earning potential as a rich source of lifelong revenue.

  • Last year, the seven largest private lenders issued almost $6.9 billion in loans to students. That is an increase of 8.1 percent from 2012, and it is the second consecutive year of growth since 2009.
  • As MeasureOne Chief Executive Dan Feshbach explained, "We are at a turn -- there's a lot of momentum and a lot of interest in private student loans. Banks are seeing more upside than downside to these loans."
  • Borrowers with high credit scores can benefit from private loans, while those with poor credit are generally stuck with government loans. Private loan rates vary considerably, from 2 percent for those with strong credit to more than 10 percent.
  • Of total outstanding student loan debt, private loans account for just 13.9 percent of the $1.2 trillion student loan market. Private loans peaked in 2008, when they constituted 18.6 percent of total student loan debt.
  • Private lenders retreated from the market during the recession, with the dollar amount of loans falling 50 percent in the 2008 to 2009 school year. During that same time, federal student loan funding increased 26 percent. Federal loans have very loose underwriting standards and do not run credit score checks on applicants.

The default rate for federal loans has only risen since 2005 (when it was 4.6 percent), with 10 percent of borrowers defaulting by September 2012 on loans from the previous year. Among private lenders, however, default rates have dropped, falling to 3.02 percent for the seven largest lenders in the third quarter of 2013.

Lenders are more confident and willing to issue loans for students who have cosigners, as most students cannot show an ability to repay.

Source: Annamaria Andriotis, "Banks Take Interest in College Lending," Wall Street Journal, February 24, 2014.


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