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The many pitfalls of private student loans

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Mallory Rego, the first member of her family to attend college, says she now sees that she put too much blind faith in the power of education.

After graduating in 2008 from Emmanuel College, a liberal arts school in Boston, she enrolled in a graduate program nearby that would have certified her to help children cope when undergoing stressful medical treatments.

But she had to drop out midway to earning her graduate degree: Although her federal loans were deferred, her private student debts came due while she was still in school and, she said, she couldn’t afford those payments, plus her rent and books. She owes $220,000 — largely in private loans — works in a yogurt shop and drives an autistic child to and from school. When she was up for a promotion from bank teller about a year ago, the offer was rescinded, she said, because of her messy credit history.

“College seemed like my ticket to success, so the large sums I was borrowing seemed like a problem for future, educated, richer Mallory to deal with,” said Rego, now 29, who has a bachelor’s degree in psychology and is living with her mother and siblings in Hamden, Conn. “I don’t pretend,” she added, “that I didn’t get myself into this mess.”

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Many student borrowers often accept the financial aid packages set before them, which may include piles of private loans that cover what federal loans do not. But students often do not realize private loans can cost more and come with few escape valves. Their parents and relatives aren’t always aware of the consequences, either. Yet when they cosign the loans — and roughly 90 percent of private loans have cosigners — they are fully liable.

That is why when a borrower runs into financial trouble, the problems can quickly escalate into a family affair, and, in extreme cases, a legal one. Some borrowers I spoke with said their cosigners panicked when they realized the graduate’s earnings prospects were bleak, so the cosigners (typically relatives who were not parents) sued, claiming fraud.

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“I can’t tell you how many borrowers told me about the real tension that was created when their lender refused to negotiate with them,” said Rohit Chopra, the student loan ombudsman at the Consumer Financial Protection Bureau until June, and now a senior fellow at the Center for American Progress. “Now, all of a sudden, their parents and grandparents were being called, and it became a discussion at Thanksgiving.”

Then there are the borrowers who have become ensnared by traps buried in the fine print. Some loans include provisions that allow them to put the loan in default if the borrower was late on an unrelated bill held by the same lender, among other things. In other contracts, even if borrowers are current on their payments, their loans can be thrown into default (and become immediately due in full) if a cosigner files for bankruptcy or dies, according to the consumer bureau.

Several of the largest private lenders say they don’t engage in these practices, but regulators contend the issue still arises on loans that have been packaged and sold to investors.

There are signs of improvement. Citizens Bank said it planned to start loan modifications soon, and Wells Fargo started modifying loans at the end of last year. Of the 194 loans it modified, it reduced payments 30 percent, on average, largely by reducing interest rates about 6 percentage points. The lender, with $12 billion in private loans outstanding, may reduce the rate temporarily or permanently.

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Navient, which services student loans and has offered modifications since 2009, said about $2 billion in private loans were enrolled in an interest rate reduction plan, or about 7 percent of its $28 billion portfolio.

Sallie Mae, which already modifies loans, also started offering a graduated repayment plan for loans made after July 1, 2013. After the six-month grace period, borrowers can make 12 interest-only payments to help lower monthly bills.

Kristin Riopelle left the University of New Hampshire in 2012 with a bachelor’s degree in theater, a minor in business, and $95,000 in private loans. But she has been able to take advantage of those types of programs, even if some lenders were difficult to work with.

But her salary as an administrative assistant still doesn’t quite cover all of her monthly payments, so her father pays about $200 on one loan, which he cosigned. She recently consolidated most of her private loans at Citizens Bank, which she said would keep her payments steady over 20 years.

She still needed a cosigner. “My mom isn’t too happy with that, since it affects her credit, too,” said Riopelle, 25.

And that is another problem. Some banks advertise that cosigners can be released after the borrower makes a certain number of payments, among other things. But that has proved challenging: About 90 percent of borrowers who make the request are rejected, according to a report in June from regulators.

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