One in a series of occasional stories

Natalie Hickey left her small hometown in Ohio six years ago and aimed her beat-up Dodge Intrepid for the West Coast. Four years later, she realized a long-held dream and graduated with a bachelor’s degree in photography from Brooks Institute in Santa Barbara.

She also picked up $140,000 in student debt, some of it at interest rates as high as 18%. Her monthly payments are roughly $1,700, more than her rent and car payment combined.

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FOR THE RECORD:
College loans: A Dec. 27 article in Section A about the costs of college loans said lawyer Marja Lopees spends about 40% of what she makes to pay off her student loans, including $88,303 she accrued in private loans. Lopees said her debt burden has lessened since she was interviewed and she no longer spends 40% of her income on her debt, but she declined to provide current income or debt figures. —

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“I don’t have all this debt because I was buying stuff,” said Hickey, who now lives in Texas. “I was just trying to pay tuition, living on ramen noodles and doing everything as cheaply as I could.”

Hickey got caught in an increasingly common trap in the nation’s $85-billion student loan market. She borrowed heavily, presuming that all her debt was part of the federal student loan program.

But most of the money she borrowed was actually in private loans, the fastest-growing segment of the student loan market. Private loans have no relation to the federal loan program, with one exception: In many cases, they are offered by the same for-profit companies that provide federally funded student loans.

As a result, some students who think they are getting a federal loan find out later that they hold a private loan. The difference can be costly.

Whereas federally guaranteed loans have fixed interest rates, currently either 6% or 6.8%, private loans are more like credit card debt. Interest rates aren’t fixed and often run 15% or more, not counting fees.

Most students have little experience in taking out loans, yet the federal government doesn’t require lenders to disclose the total cost of a student loan and other terms upfront — before signing — as it does for car loans and mortgages.

“Students are in the cross hairs, being bombarded by very sophisticated and, to some extent, ethically marginal lenders,” said Rep. George Miller (D-Martinez), who sponsored legislation passed this year that will require lenders to provide more disclosures on fees. “My fear is that we are developing a predatory market, just like we have had in mortgages.”

About $15 billion in private student loans are expected to be funded this year, a 900% increase from a decade ago, according to the nonprofit College Board. Private loans are growing faster than federally guaranteed loans, which rose 59% over the same period, in part because of limits on how much students can borrow with the government’s backing.

Four years at a public university, including room and board, costs an average of $57,332, according to the College Board. The average tab for a private university is $136,528. Yet the maximum that can be borrowed under the federal loan program is $31,000.

High-cost private loans fill that gap. One result is that students now average nearly $20,000 in debt by the time they graduate, twice as much as a decade ago.

“There is an alignment of interests that lead students to take out larger and larger amounts of debt,” said Luke Swarthout, a former higher education advocate at the U.S. Public Interest Research Group in Washington.

“The students think it’s an investment in their future, and the colleges are willing to let them borrow heavily because it helps them fill in their enrollment.”

In the dark

Hickey knew she would need loans to complete her degree, so she went to the campus financial aid office as a freshman. After she filled out paperwork, Brooks Institute set her up in a loan program administered by Sallie Mae, the nation’s biggest student lender.

Sallie Mae was chartered by the federal government in 1972, and most of its business is in issuing federally insured student loans. But while it may appear to be a quasi-government agency, it is in fact a for-profit company whose stock trades on the New York Stock Exchange.

Hickey ended up with $20,000 in low-interest federally guaranteed loans issued by Sallie Mae, and $120,000 in higher-interest private loans issued by Sallie Mae.

Hickey said no one explained the difference to her.

“The financial aid officer just said that my federal loans weren’t enough to pay the tuition, but that was OK because they had these great alternative loans,” Hickey said. “They made it sound so good that I didn’t ask that many questions.”

Tim Halsey, vice president of finance for Brooks Institute, declined to discuss Hickey’s case directly, citing federal privacy laws. But he said the school’s financial aid officers take great pains to explain the differences between loans and to guide students to the best deals.

“It is really to our advantage to get the loans and interest rates as low as possible,” Halsey said.

“My motivation is to get that person to come to the school, if that’s what they want to do. If I can get those costs as low as possible, it benefits us both.”

Spotty disclosure

But some lenders market directly to students, and consumer advocates say they often fail to clearly detail loan costs and may even seek to present themselves as part of a school’s financial aid office.

For a glimpse into how lenders operate, The Times filled out online loan applications with JPMorgan Chase & Co., Sallie Mae and MyRichUncle. An 18-year-old student who began college this fall agreed to provide personal information, including her Social Security number, so that lenders would provide detailed loan terms.

JPMorgan Chase, the giant New York bank, did not disclose its interest rates or fees in the online application.

Sallie Mae, which is based in Reston, Va., disclosed an interest rate and fee, but an attached disclaimer in capital letters said the numbers were preliminary “and may change.”

The third, MyRichUncle, a New York-based student loan firm formed in 2005, disclosed a variable rate that starts at 9.6% and said there would be an unspecified origination fee.

The loan companies provided a bit more information over the phone. A MyRichUncle representative said its origination fee would be 2%. A Chase agent said the variable rate would start at 7.5% with no origination fee, and Sallie Mae said its variable rate would be 8%, also with no fee.

After initially resisting, agents for Sallie Mae and Chase both agreed to provide summaries of the loan costs in writing. But the one-page letters they mailed did not include the total cost of the loan over time.

The Times then called all three lenders to discuss their practices. MyRichUncle co-founder Raza Khan said that the failure to state the amount of the origination fee in the online application was a mistake and that the information was now included.

Sallie Mae spokeswoman Martha Holler maintained that the company’s disclosures were adequate.

JPMorgan Chase spokeswoman Mary Kay Bean said the loan terms would be sent after the loan had been approved, pointing out that the company was not required to do so beforehand.

“We send borrowers a letter with the rate,” Bean said. “We comply with the law. That’s it.”

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