The Predatory Practices of Private Loan Companies and Educational Accessibility
Introduction: The Financial Barriers to Higher Education
With the rise of a complex and competitive job market, higher education has grown to be an essential component for a stable and well-paying job. Positions formerly open to high school diploma holders have recently added additional qualifications, making them strictly available to individuals with a minimum of a bachelor's degree. Many "entry-level" occupations in the legal sector now require 1-2 years of legal experience, complicating the search for first-time opportunities for students. In response to this increasing challenge, a growing number of students started enrolling in undergraduate and graduate programs to earn a college degree. In 2001, just 11% of individuals over 25 had a master's degree, a figure that more than doubled to 24.1% by 2021. Moreover, in 2001, only 31.5% of individuals aged 25 and older possessed a bachelor's degree, whereas by 2021, this figure exceeded half, reaching 52.8%. 
What hasn’t changed, however, is the college cost problem. While demand for a college degree has grown throughout the years, tuition has followed. In 2001, the average annual tuition for a 4-year college was $3,500 for public, in-state institutions and $15,810 for private, nonprofit institutions. However, little more than a decade later, in 2023, the average cost was $9,370 for public, in-state institutions and $38,420 for private nonprofit institutions. An analysis of the data indicates a 167.7% increase in tuition fees for public, in-state schools and a 143% increase for private non-profit institutions.
Nevertheless, the federal minimum wage has risen from $5.85 in 2001 to $7.25 in 2009, indicating a modest 40% increase. Furthermore, the median household income from 2001 to 2023 increased from $68,870 (in 2023 C-CPU-U Dollars) to $80,610, reflecting only a 17% increase. This gap suggests that tuition costs are escalating at a significantly faster rate than wages and household income, thereby enacting a structural financial burden on families and students seeking higher education.
Consequently, students from moderate to lower-income households have continued depending on both federal and private loans, with 6% of students at public four-year colleges and 11% at private non-profit institutions holding private loans. Consequently, private student loan debt soared by 88.8% from 2001 to 2003, totaling $130 billion in 2023. The main victims of the debt trap being lower income families, as “more than half of private loan borrowers receive[...] need based grants.” As college degrees become increasingly important for high-paying jobs and overall life stability, private loan companies have taken advantage of lower-income students, who are increasingly dependent on private loan, rendering access to higher education, and consequently high-paying careers, a disproportionately greater obstacle for America’s most marginalized communities.
Breaking Down Private Loan Inaccessibility
While private loans operate under the guise of assisting families in managing college expenses by facilitating immediate purchases with deferred payments, numerous skeptical components are present regarding these loans: understanding of their terms and conditions, compliance with TILA regulations, consequences for co-signers, interest rates, and repayment structures.
Individuals who have applied for private student loans can verify the complex jargon used in these loan agreements. In contrast to federal student loans, which provide uniform conditions to all eligible students, various private loan institutions—such as Sallie Mae, Discover, Citizens Bank, SoFi, and PNC Bank—impose unique terms and conditions, complicating the process for students and families to evaluate and choose the option that is best for them. Moreover, intricate legal terminology such as “variable interest rates,” “co-signer,” “forbearance,” “capitalization,” and “Secured Overnight Financing Rate (SOFR)” significantly prevents families with limited financial literacy—primarily low-income families—from fully understanding the agreements they are approving.
In contrast to consistent federal loans, private loans demonstrate far more rigidity and involve elevated interest rates for infringement with their complex policies. For instance, Citizens Bank offers a fixed APR Range of 3.49% to 14.99% and SoFi offers between 3.54% and 15.99%. Now, because this range is large, raises concerns regarding these companies' adherence to the informed consent principle, as APR rates are not easily accessible to students and are inadequately clarified in understandable language for people to fully understand the financial implications.
In addition, the upper range of APR rates (14.99%-15.99%) is primarily assigned to low-income, predominantly students of color, who are compelled to secure loans out of necessity. Furthermore, low-income borrowers are often perceived as "high-risk" due to low credit scores, lack of credit history, or unstable income. Private lenders enforce higher APR rates on low-income families, capitalizing on their struggles in repaying loans promptly, while higher-income families benefit from reduced APR rates and simultaneously have the capacity to repay their loans faster and with minimal risk. This approach presents a significant ethical challenge, as the profits of these organizations depend on the financial hardships of their most vulnerable borrowers. In essence, student loan debt is one of the main proponents uplifting the massive financial gap that currently exists between the rich and the poor.
An article by Ramenda Cyrus in The American Prospect argues against the predatory behaviors of these loaners as “they manipulate the terms of the loan to keep the customer borrowing more and more.” These forms of manipulation present themselves in various way like ”high interest rates, hidden fees, and constant rollovers into new loans accruing more interest that can trap people.”
Under the Truth in Lending Act (TILA), creditors are mandated to provide clear written disclosures concerning finance charges, APR, and other key terms of consumer credit transactions. When private lenders fail to accurately disclose these elements, such as APR, loan costs, and penalties for late or missed payments, they may violate TILA provisions, particularly if they satisfy the definition under law of a “creditor.” However, some profit-driven lenders take advantage of loopholes by hiding important loan provisions in fine language and complicated legal jargon. This approach can effectively disrupt TILA's mission of transparent and informed lending by misleading borrowers into thinking that specific fees, fines, or risks do not apply. And then, to add fuel to the fire, borrowers of private loans are rarely eligible for bankruptcy discharge which means that they have little avenue to escape the burdens of their debt. Because of disparate impact, following Title VI of the Civil Rights Act of 1964, any institution, like private lender and their partners, that receives federal funding can be held liable for discrimination even if was done without clear intent. Therefore, it can be argued that some private lenders, particularly those in cooperation with federally financed institutions, may be in violation of Title VI if their lending practices have a discriminatory effect.
Are Private Loans Really for Everyone?
In addition to the potentially predatory schemes that trap borrowers, there are also systemic flaws built into the loan approval process that adversely affect families from different socioeconomic groups. Many private lending companies require co-signers, which disproportionately affects students with unstable family financial assistance, making it very difficult for them to secure a co-signer to get loans. These barriers have effectively discouraged young people from pursuing higher education, creating an inequitable situation that no one should be bound to face. Moreover, when financially disadvantaged students find co-signers, their lack of flowing income or financial structure extends the risk of loans onto families. The Project on Predatory Student Lending (PPSL) states that even after decades, "students and their family members who cosigned loans are still being held hostage." Although many students have been repaying their loans, sometimes covering the total borrowed amount, "compounding interest means they owe that same amount twice over." Moreover, rising interest rates prevent the complete payback of debts, resulting in a continuous accrual of interest that traps the borrower in an endless cycle of repayment.
A partial solution to these unfair practices was enacted by the Consumer Financial Protection Bureau, or CFPB, where they “proposed the first-ever comprehensive federal regulations to address unfair, deceptive, or abusive practices in the payday and auto title lending marketplace.” The CFPB also conducts audits of private lending companies to ensure their compliance to consumer protection laws, applies penalties on those that violate these regulations, and strictly enforces disclosure regulations, including TILA.
While CFPB does a great job of enhancing protections for families, there remains one issue that even they can’t solve. DACA (Deferred Action for Childhood Arrival) recipients cannot take out federal loans. Furthermore, 34% of kids eligible for DACA lived with families at or below the poverty line. Those granted DACA have significant structural challenges in affording higher education, as they do not qualify for federal aid. Despite substantial media discourse on whether DACA recipients should qualify for federal assistance, it is crucial to acknowledge that these individuals did not pick their circumstances. DACA recipients are being unjustly penalized by being denied access to services which promote their success in the United States. This also pushes DACA recipients to take out private loans with elevated APR rates, a massive risk just to obtain a college education. There are so many existing branches of inequity that grows out of reliance of private loans. It’s time that these loan companies be held more liable for the inethical nature by which they get their profits.
Suggested Reform
While reliance on private loans is party rooted in systemic inequities, there is a clear solution that will protect the interests and pockets of students seeking financial assistance. Because the CFPB already operates under the interest of buyer protection, the CFPB could push lenders to use plain language for their loan disclosures that clearly map out how much the loan will accumulate after X amount of time based on specified interest rates. Furthermore, the CFPB could strengthen and further enforce penalties on those institutions that fail to articulate the financial implications in a way that’s easily understood by people from all sorts of educational backgrounds. On that same thread, it’s also beneficial to think about the development of third-party auditing. By having private lenders audited, the CFPB’s authority would be strengthened.
Nonetheless, it’s important to also consider that “plain language” is subjective as “plain language” to a native English speaker often looks a lot different than it does to someone who speaks English as a second language. A way of overcoming this barrier is to require people to have meetings, which can be held virtually, with the loaners. By requiring meetings to be held, borrowers can ask those critical clarifying questions and receive feedback that is specific to their individual financial situations. As an additional safeguard, borrowers should be required to complete a short quiz that ensures they understand the financial implications before they are signed into the agreement; this also strengthens TILA.
And finally, the more obvious choice in protecting families in need from falling into economic holes dug out by private loaners is to simply expand federal loans; by gradually raising the cap for federal loan requirement and amending the Higher Education Act to allow DACA students and part-time students to also take out loans.
Private loans represent just a small fraction of the systemic disparities in access to higher education. As inequities continue to become more prominent through the defunding of DEI programs and affirmative action bans, it’s important that more attention is raised toward economic policies and laws. The path to a better, brighter, and safer future begins with youth and therefore making sure that everyone has the right to education.