Private Student Loans Work Like Subprime Mortgages

Private lenders offered student loans without confirming that recipients could pay them back—then sold them to investors, thus protecting the lenders against defaults, a government study finds. Sound familiar? It should: It's a lot like the process that caused the subprime mortgage crisis. Some $8.1 billion worth of private loans—more than 850,000 cases—are now in default, the AP reports. "Subprime-style lending went to college, and now students are paying the price," says Education Secretary Arne Duncan.

Private loans soared from $5 billion originating in 2001 to more than $20 billion in 2008, and recipients currently owe more than $150 billion. Combine private loan debt with federal, and you get $1 trillion in total student debt. But while government-backed loans can be reduced and postponed, private loans hardly ever offer that option. Nor can they be wiped out by filing for bankruptcy. "Too many student loan borrowers are struggling to pay off private student loans that they did not understand and cannot afford," says the head of the Consumer Financial Protection Bureau. (More student loans stories.)