Financial Strains for Many New Graduates Due to Private Student Loans
A Hamburg lawyer, Achim Tiffe, has warned about the risks of private student loan offers, which often catch students off guard on campus or online and they end up signing contracts that later prove to be a financial burden. More than 60 cases have come to his attention, with the majority of the contract conditions deemed “unfair” by Tiffe. Exorbitant interest rates and extremely long contract periods are common features of these private loans.
Courts have already ruled in some cases that the loans are “unfair and usurious” as seen in a 2016 decision by the Aachen District Court, which found that a former student was not adequately informed about the total interest that would be due.
The state does provide financial support for students in need, including the Bafög allowance and a student loan from the German Development Bank (KfW). However, the interest rates on the KfW loan have recently risen to nine percent, making the offer less attractive to students. As a result, students are seeking out private lenders, with the number of new contracts rising to nearly 1,900 per year, according to a report.
“Because state-backed study financing is currently not designed or attractive enough, students are increasingly turning to private education funds” said Ulrich Müller, an expert on student loans at the Centre for Higher Education Development (CHE).
A person who spoke to the magazine about her experience with a private student loan provider reported that she had to pay back a loan of around €10,000 in monthly installments of €577, which is 9.5 percent of her gross income. The loan had a ten-year repayment period, during which she would end up paying back more than twice the original amount, equivalent to an annual interest rate of almost 13 percent.
The International University in Bad Honnef, where the student attended, expressed regret that the loan conditions may have exceeded the acceptable range and caused financial difficulties for the student. The university has decided to put the cooperation with the loan provider under review and will no longer actively promote the provider’s services on its platforms and channels.
The loan provider, on the other hand, points out that the Higher Regional Court of Stuttgart has found that the loan conditions are not unfair simply because they are compared to market interest rates. Students without a steady income may not have been able to secure a conventional consumer loan, the provider claims. The total amount of the installments has been capped at double the original amount in newer contracts, taking into account inflation, the provider says. In older contracts, the provider claims to have handled the installments in a similar way in practice.