The growth in private student loan borrowing slowed considerably last year according to the College Board, but that’s hardly reason to celebrate. Private loan borrowing continues to escalate at alarming rates for undergraduate students, and much of the debt is being taken on by students who can least afford it.

Overall, students borrowed $18.5 billion in private loans from for profit companies and state nonprofit lenders in the 2006-07 academic year, or six percent more than in the prior year, the College Board reports in the latest version of its annual student aid survey. That total is a significant drop from the average annual increases of about 27 percent during the last five years.

But most of the reduced level of growth in private loan borrowing occurred among graduate and professional students. In 2006-07, graduate students were allowed, for the first time, to take out federal PLUS loans, which were previously available only to the parents of college students. Borrowers can use PLUS loans, which tend to have lower interest rates and greater protections than private loans, to cover the full cost of attendance for their educational programs. According to the report, graduate students took out about $2 billion in PLUS loans last year.

Over the last decade, private loan borrowing overall has grown an astounding 674 percent, when adjusted for inflation. Private loans made up about 24 percent of the total volume of loans awarded last year. That’s double the 12 percent share they made up in 2000-01, and four times the 6 percent share they held a decade ago.

Behind the Numbers

Last year, undergraduates borrowed about $16 billion in private loans. Private loans now constitute 29 percent of all loans taken out by undergraduates. [This was the first time the College Board broke down the data in this way, and therefore wasn’t able to show how much this share has grown over past years.] Students who attend private four year colleges have taken on the largest share of this debt. In 2006-07, private loans made up nearly one-third of all debt taken out by private college students.

Low-income students are taking on a considerable amount of private loan debt. According to the College Board, 48 percent of students from families with incomes below $40,000 borrowed from federal and private sources in 2003-04, compared to 39 percent in 1992-93. That same year, about 17 percent of the loans those students assumed were private loans.

Implications

The data indicates that the slowdown in growth of private loan borrowing shouldn’t bring any false comfort to policymakers. Undergraduates are getting buried in private loan debt. And with colleges continuing to increase their cost of attendance at rates far faster than inflation, there is little chance that things will get better anytime soon. if anything, things are only like to get worse. Congress was absolutely right in cutting the subsidies that lenders make on federal student loans -- but an unintended consequence of that action is that these loan companies are likely to become even more aggressive in pushing private loans

Just listen to what C.E. Andrews, Sallie Mae’s Chief Executive Officer, recently told investors when talking about the importance of private loans to the company's fiscal health.  "This is essential to us," he said during a conference call announcing the company's latest quarterly earnings. "This is our economic engine on the loan side of the business."

Borrowers, be afraid. Be very afraid.

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