Risky lending caused private student loan debt to balloon in the past decade, leaving many struggling to pay off loans that they can’t afford, a government study said.
Private lenders gave out money without considering whether borrowers would repay, then bundled and resold the loans to investors to avoid losing money when students defaulted, according to the study released Friday.
Those practices are closely associated with subprime mortgage lending, which inflated the housing bubble and helped bring about the 2008 financial crisis.
‘‘Subprime-style lending went to college, and now students are paying the price,’’ said Education Secretary Arne Duncan, whose department produced the report with the Consumer Financial Protection Bureau.
Duncan said the government must do more to ensure that people who received private loans enjoy the same protections as those who borrow from the federal government.
Student loans fall into two main categories: Loans directly from the government and those offered by banks and other private lenders. The report focused on private student loans, which spiked from $5 billion in loans originated in 2001 to more than $20 billion in 2008. After the financial crisis, as lending standards tightened, the market shrank to $6 billion in 2011.
American consumers still owe more than $150 billion in private student loan debt, the study said. Including federal loans, Americans now owe more than $1 trillion in student loan debt, according to the Consumer Financial Protection Bureau.
Students often did not understand the difference between federal and private loans, the study said. That caused many to take out costly student loans when they were eligible for cheaper, safer government loans. The study highlights a unique feature of student debt: Unlike other credit card balances and other debt, it is nearly impossible to cancel student debt by filing for bankruptcy.
Lending standards for private student loans were loose during the credit bubble of the mid-2000s, the report said. Because private lenders marketed directly to students, bypassing school financial aid officers, schools did not review borrowers’ financial needs or enrollment status. As a result, many borrowed far more than they needed to pay tuition.
The head of a trade group representing for-profit colleges said in a statement that private loans sometimes are necessary for people to complete their degrees. ‘‘These loans provide students access to higher education opportunities that they would otherwise not be able to pursue,’’ said Steve Gunderson, president and chief executive of the Association of Private Sector Colleges and Universities.