Lenders Defend Private Student-Loan Practices

Lenders and administrators of private education loans defended their practices during a June 6 hearing before a U.S. Senate committee. Representatives of First Marblehead Corp., Bank of America and Sallie Mae told members of the Senate Committee on Banking, Housing, and Urban Affairs that private education loans are necessary for many students to fill the gap between the cost of college and the financial resources available to families.

“Overall debt levels are a function of rising education costs and the shortage of scholarship money and grants, not industry pricing or practices,” said Tracy Grooms, senior vice president and student banking executive, Bank of America. “The student-loan industry has responded to consumers’ demands for comprehensive education financing by developing private-loan products with flexible terms that ensure loans will be repaid over time, and has done a good job of ensuring consumers receive loans in amounts and with terms they can afford.”

All three private-loan representatives told the panel that they encourage borrowers to exhaust their eligibility for federal student loans and other federal financial aid before applying for private loans. They also contended that their private-loan products are priced fairly given the lack of a federal guarantee, the absence of collateral and the fact that most students don’t meet traditional standards for creditworthiness.

On the other hand, New York Attorney General Andrew Cuomo criticized the private-loan industry as “the Wild West of the college-loan business.” He contended that private-education-loan practices are largely unregulated and that federal regulatory agencies have been “asleep at the switch” in responding to allegations of improprieties in the private student-loan market. Cuomo also indicated that he will expand his investigation of the student-loan industry to include the underwriting practices used to determine the rates, fees and availability of private education loans.

Sen. Christopher Dodd, D-Conn., who chairs the committee, told the panel that he would be contacting federal banking regulators to ask what steps they have taken and can take regarding oversight of private education loans.