Tom Joyce, a spokesman for Sallie Mae, said the average rate now is between 10% and 11%, around what most banks are charging for private student loans, which are not subsidized and government-guaranteed like federal loans.
"The comparison to federal student loan rates is unfair and artificial," he wrote in an e-mail. "The comparison should be to borrowing on a credit card or other unsecured loans."
The student and consumer advocacy groups who wrote to Paulson say that far too many students unnecessarily take on private student loans. One out of five private student loan borrowers did not first take out federal student loans, and nearly half did not borrow the maximum amount available under the federal programs, according to a study by the American Council on Education, which represents college and university presidents.
Experts and government officials say students should exhaust federal student loans before they turn to private ones.
The estimated 8% of undergraduates who take out private loans are often the victims of misleading and deceptive advertising, and get saddled with interest rates two or three times as high as federal loans, according to the Nov. 19 letter to Paulson. The Treasury has not responded to the letter.
Industry officials counter that private student loans are crucial for students struggling to pay ballooning tuition costs. The National Assn. of Student Financial Aid Administrators called private student loans a "necessary evil."
"How realistic is it to say that families shouldn't use private student loans when college costs are increasing faster than the rate of inflation?" said Kevin Bruns, executive director of America's Student Loan Providers, an industry group.
Federal loans, however, can cover the entire cost of tuition and living expenses in nearly all cases, consumer advocates say.
"The less dependent that students are on private student loan financing to pay for college, the better off they will be in the long run," said Christine Lindstrom, the director of the higher education project at U.S. Public Interest Research Groups. "Private student lenders and banks do not need further incentives to push-market their expensive, risky loan products on vulnerable students and families."
