The use of private loans to pay college expenses has boomed in the past decade.
The business has grown so much, so fast, in fact, that even some lenders have found themselves in over their heads.
After losing $1.6 billion in the fourth quarter of 2007, financial behemoth Sallie Mae said it planned to curtail or decrease private lending to students at schools with poor graduation rates.
Other lending institutions also are pulling back or eliminating private loans, raising the question of how some students will pay for education.
The Career College Association said one-third of its members who responded to a recent survey reported that lenders had stopped making private loans to their students. The Washington, D.C.-based association, which represents private career and technical schools, said the change comes as many adults ponder a return to school because of the slowing economy.
Private loans generally carry higher interest rates than federal Perkins, Stafford and PLUS student loans, meaning they cost students more over time.
The nonprofit Consumers Union said in a July report that students and parents often don't understand the difference between federal and private loans; don't understand the costs of private loans; and often don't revisit aid packages after the freshman year to see whether a better deal is available. As a result, the report said, students take on more debt than they need or can afford.
Among other suggestions, Consumers Union recommended mandatory online credit counseling for students and standardized language in financial aid letters from colleges to let students know exactly what costs and aid amounts are.
"Families are confused by the federal funding process. With three federal loan types (each with different rates, fees and terms) and unlimited direct-to-consumer marketing of private loans, it's not surprising that students and parents make uninformed decisions that cost them more than necessary," said the report by Michael Wroblewski, Consumers Union project director for consumer education and outreach.
There's no central clearinghouse for information about private loans.
The Cranberry-based Web site www.finaid.org, published by Mark Kantrowitz, offers an overview of private loans and other kinds of aid.
Students may use a Consumers Union worksheet to evaluate offers. The worksheet allows a side-by-side comparison of fees; interest rates, fixed and variable; repayment periods; and repayment amounts, monthly and cumulative.
"I can't say I'm for or against these loans whatsoever," said Keith Paylo, senior director of student services at Point Park University.
He said private loans are "another product" to help pay for schooling.
Point Park doesn't maintain a list of preferred lenders, as some schools do. The school does keep brochures that provide information about private loans and will make counselors available to answer questions.
"Education for both parents and students is key in any type of lending," Mr. Paylo said.
In 1996-97, lenders made $1.6 billion in private student loans. By 2006-07, private loans totaled $17 billion, up 989 percent for the decade, according to the College Board's 2007 "Trends in Student Aid" report.
Private loans last school year accounted for 24 percent of all student loans, and that figure doesn't include credit card charges and home equity loans that some families used to pay college bills, the report said.
Sallie Mae, banks and other lenders long have had a hand in the student aid market, making loans through the federal Stafford and PLUS programs. The government sets borrowing limits and interest rates on them.
Private loans burst onto the scene because of slow growth in federal aid programs and rising tuition. They may help students bridge the gap between federal aid and college costs, but they carry higher, variable interest rates, often tied to the borrowers' credit scores, according to Consumers Union.
Some borrowers have reported interest rates as high as 19 percent on private loans, whereas the maximum interest rate on federal Perkins loans is 5 percent, Stafford loans 6.8 percent and PLUS loans 8.5 percent. Private loans also may have higher fees or more stringent repayment provisions than government-backed loans.
Students and parents may latch onto private loans because they're pressed to complete financial-aid packages before school begins or because they're wooed by flashy promotions that made the loans sound easy and convenient.
"Get a check sent to you in about a week!" one Web ad exclaims. That company offers "preliminary approval in as little as 15 minutes" but requires viewers to provide their names and e-mail addresses to get additional details.
Adding to the controversy surrounding private loans are ethical questions raised last year by New York Attorney General Andrew Cuomo and leaders in Congress.
Mr. Cuomo accused some schools of receiving payments for directing students to certain lenders and said lenders gave all-expense-paid trips to college officials, established "credit lines" for schools that steered students to private loans, and operated telephone call centers for school financial aid offices.
Also under scrutiny are so-called "opportunity pools," in which lenders made money available for sub-prime loans in exchange for a share of the school's federal loan business.
Mr. Cuomo persuaded a number of schools to accept a new code of conduct. In addition, Congress is considering a proposal that would require schools and lenders to disclose business relationships and ban lenders from giving gifts worth more than $10 to college employees.
Now, though, market forces may be curbing private loan volume.
Sallie Mae and others are experiencing a growing default rate. The sub-prime mortgage crunch has spilled over into the student loan area, too, with investors less willing to buy loans of different kinds, said Stephen Burd, senior research fellow at New America Foundation, a nonprofit think tank.
"It's just a question of securitization right now," Mr. Burd said.
Sallie Mae announced last month it would cease or scale back private loans at colleges with low graduation rates.
The lender has found that most defaults involve students who withdraw from school or drop below half-time enrollment, Sallie Mae spokespeople Tom Joyce and Martha Holler said.
Sallie Mae set aside $1.2 billion for projected losses on private student loans issued in 2007. In comparison, Sallie Mae set aside $273 million for projected losses on 2006 private loans.
Because the private loan market is still relatively new, Mr. Joyce said, lenders "are learning as we go here in terms of the results of these loans as they season."
New Kensington native and University of Pittsburgh graduate Harris Miller, president of the Career College Association, said he fears the "retreat" by private lenders may leave students unable to plug gaps in financial-aid packages.
The Consumers Union study called for stepped-up education about loan options, saying students and parents often didn't even try to apply for low-interest federal loans before venturing into the private market.
The group called for standardization language in colleges' financial aid award letters so students know exactly what the costs and sources of aid are. The letters would offer comparative information about private loans so students could see how different interest rates translate into monthly and lifetime payments.
Consumers Union also wants lenders to be required to provide "plain English disclosure of rates and terms" so borrowers better know what they are agreeing to accept.
Joe Smydo can be reached at firstname.lastname@example.org or 412-263-1548.