Natalie Hickey left her small hometown in Ohio six years ago and aimed her beat-up Dodge Intrepid for the West Coast. Four years later, she realized a long-held dream and graduated with a bachelor's degree in photography from Brooks Institute in Santa Barbara.
She also picked up $140,000 in student debt, some of it at interest rates as high as 18%. Her monthly payments are roughly $1,700, more than her rent and car payment combined.
"I don't have all this debt because I was buying stuff," said Hickey, who now lives in Texas. "I was just trying to pay tuition, living on ramen noodles and doing everything as cheaply as I could."
Hickey got caught in an increasingly common trap in the nation's $85-billion student loan market. She borrowed heavily, presuming that all her debt was part of the federal student loan program.
But most of the money she borrowed was actually in private loans, the fastest-growing segment of the student loan market. Private loans have no relation to the federal loan program, with one exception: In many cases, they are offered by the same for-profit companies that provide federally funded student loans.
As a result, some students who think they are getting a federal loan find out later that they hold a private loan. The difference can be costly.
Whereas federally guaranteed loans have fixed interest rates, currently either 6% or 6.8%, private loans are more like credit card debt. Interest rates aren't fixed and often run 15% or more, not counting fees.
Most students have little experience in taking out loans, yet the federal government doesn't require lenders to disclose the total cost of a student loan and other terms upfront -- before signing -- as it does for car loans and mortgages.
"Students are in the cross hairs, being bombarded by very sophisticated and, to some extent, ethically marginal lenders," said Rep. George Miller (D-Martinez), who sponsored legislation passed this year that will require lenders to provide more disclosures on fees. "My fear is that we are developing a predatory market, just like we have had in mortgages."
About $15 billion in private student loans are expected to be funded this year, a 900% increase from a decade ago, according to the nonprofit College Board. Private loans are growing faster than federally guaranteed loans, which rose 59% over the same period, in part because of limits on how much students can borrow with the government's backing.
Four years at a public university, including room and board, costs an average of $57,332, according to the College Board. The average tab for a private university is $136,528. Yet the maximum that can be borrowed under the federal loan program is $31,000.
High-cost private loans fill that gap. One result is that students now average nearly $20,000 in debt by the time they graduate, twice as much as a decade ago.
"There is an alignment of interests that lead students to take out larger and larger amounts of debt," said Luke Swarthout, a former higher education advocate at the U.S. Public Interest Research Group in Washington.
"The students think it's an investment in their future, and the colleges are willing to let them borrow heavily because it helps them fill in their enrollment."
In the dark
Hickey knew she would need loans to complete her degree, so she went to the campus financial aid office as a freshman. After she filled out paperwork, Brooks Institute set her up in a loan program administered by Sallie Mae, the nation's biggest student lender.
Sallie Mae was chartered by the federal government in 1972, and most of its business is in issuing federally insured student loans. But while it may appear to be a quasi-government agency, it is in fact a for-profit company whose stock trades on the New York Stock Exchange.
Hickey ended up with $20,000 in low-interest federally guaranteed loans issued by Sallie Mae, and $120,000 in higher-interest private loans issued by Sallie Mae.
Hickey said no one explained the difference to her.
"The financial aid officer just said that my federal loans weren't enough to pay the tuition, but that was OK because they had these great alternative loans," Hickey said. "They made it sound so good that I didn't ask that many questions."
Tim Halsey, vice president of finance for Brooks Institute, declined to discuss Hickey's case directly, citing federal privacy laws. But he said the school's financial aid officers take great pains to explain the differences between loans and to guide students to the best deals.
"It is really to our advantage to get the loans and interest rates as low as possible," Halsey said.
"My motivation is to get that person to come to the school, if that's what they want to do. If I can get those costs as low as possible, it benefits us both."
But some lenders market directly to students, and consumer advocates say they often fail to clearly detail loan costs and may even seek to present themselves as part of a school's financial aid office.
For a glimpse into how lenders operate, The Times filled out online loan applications with JPMorgan Chase & Co., Sallie Mae and MyRichUncle. An 18-year-old student who began college this fall agreed to provide personal information, including her Social Security number, so that lenders would provide detailed loan terms.
JPMorgan Chase, the giant New York bank, did not disclose its interest rates or fees in the online application.
Sallie Mae, which is based in Reston, Va., disclosed an interest rate and fee, but an attached disclaimer in capital letters said the numbers were preliminary "and may change."
The third, MyRichUncle, a New York-based student loan firm formed in 2005, disclosed a variable rate that starts at 9.6% and said there would be an unspecified origination fee.
The loan companies provided a bit more information over the phone. A MyRichUncle representative said its origination fee would be 2%. A Chase agent said the variable rate would start at 7.5% with no origination fee, and Sallie Mae said its variable rate would be 8%, also with no fee.
After initially resisting, agents for Sallie Mae and Chase both agreed to provide summaries of the loan costs in writing. But the one-page letters they mailed did not include the total cost of the loan over time.
The Times then called all three lenders to discuss their practices. MyRichUncle co-founder Raza Khan said that the failure to state the amount of the origination fee in the online application was a mistake and that the information was now included.
Sallie Mae spokeswoman Martha Holler maintained that the company's disclosures were adequate.
JPMorgan Chase spokeswoman Mary Kay Bean said the loan terms would be sent after the loan had been approved, pointing out that the company was not required to do so beforehand.
"We send borrowers a letter with the rate," Bean said. "We comply with the law. That's it."
Lenders in disguise
When Shianily Torres took out $38,000 in student loans at Florida's International Academy of Design and Technology, she thought she was dealing with the college financial aid office.
She now thinks it may actually have been a representative of Sallie Mae -- in part because that was the only company that offered her a loan.
"My father asked if there was somewhere else we could get the loan and they said no. The school didn't accept money from just any bank," Torres said.
Torres said she didn't learn the rate on her loan until after graduation, when she got the bill. The variable rate rose as high as 18.5%, which requires a monthly payment of $650 -- more than twice what she makes in her part-time job.
She said that she couldn't make the payments, and that Sallie Mae had not responded to her efforts to renegotiate terms.
An investigation last year by New York Atty. Gen. Andrew Cuomo found an "unholy alliance" between lenders and hundreds of schools across the country.
Charging more than a dozen lenders with wrongdoing, Cuomo cited a pattern of bribes to financial aid officers making decisions about which lenders would appear on school-preferred lender lists and "revenue-sharing" kickbacks -- in cash or products -- to schools that led their students to specific companies.
Hundreds of colleges agreed to abide by new ethics rules and not to accept gifts, and half a dozen even refunded money to students. The U.S. Department of Education tightened its guidelines to discourage quid pro quo arrangements.
More than a dozen student lenders, including Sallie Mae, Bank of America, Citibank and JPMorganChase, paid a combined $13.7 million to settle Cuomo's charges, without admitting or denying the allegations.
Private litigation continues, however. Torres is one of dozens of students who are suing Sallie Mae, alleging deception and discriminatory practices that left low-income and minority students saddled with the highest-cost loans.
Andrew Meyer, the Tampa, Fla., attorney handling the case, said his law firm gained insight into Sallie Mae's practices from people who formerly worked there as loan officers.
A key strategy was to make students believe the loan officers worked directly for the college, he said. Meyer said Sallie Mae purposely sent disclosure forms a month or more after classes had begun so that students would be less likely to protest onerous terms.
Sallie Mae's Holler said she could not comment on litigation, but she defended the company's lending practices.
"It's risk-based pricing," she said. "Students can take advantage of an interest rate decline, like we've seen in the past several months, but the loan rates also have the potential to rise when there is a rising rate environment."
In addition to working with schools, lenders try to reach students directly. Although some companies have failed in the credit crunch, dozens remain in business, sending e-mails to students and advertising on sites such as YouTube.
Loan-shopping websites also lure young people into private loans, said Nancy Coolidge, a financial aid executive with the UC Board of Regents.
She noted that one site -- TuitionBids.com -- encouraged students to seek federal loans first but also had a "let the bidding begin" button that directed users to an application for a private loan.
"The way the site is set up encourages misunderstanding," Coolidge said. "They do what we ask by saying that private loans should be a last resort, but then ask, 'Are you interested?' When the kid clicks yes, they're catapulted to a private loan."
Keith Alliotts, chief executive of TuitionBids.com, counters that customers are able to choose either a private or a federally guaranteed loan.
"We don't advocate just private loans, we tell borrowers to get federal money first," he said. "But a lot of people need private loans."
But Alliotts acknowledged that TuitionBids.com receives a loan fee when a customer secures a private loan. The website makes nothing when consumers get a federally guaranteed loan.
Federal loan limits
Marja Lopees of Burbank is a few years out of school and makes about $70,000 a year as a lawyer. But she racked up $196,253 in debt and says her student loan payments swallow 40% of her earnings.
Lopees turned to private loans when she hit borrowing limits imposed by the federal student loan program. Now she has $88,303 in private loans that charge an interest rate of 8.84%. The payment on that loan is her second-largest monthly expense, after rent.
"I'm making interest-only payments on one of the loans, and still the payments keep going up," she said. "It's just overwhelming."
When she just makes minimum payments, her debt and rent consume 60% of her after-tax income. That's before she pays for food, clothing, utilities, and gasoline or saves for long-term goals.
"No one tells you to be careful of taking on too much debt when you're in school," she said. "It's just the opposite. They just keep giving you loans and saying, 'Don't worry about it. You're going to be a lawyer. It's no big deal.' "
Kristof is a freelance writer.
Hooked on debt
One in a series of occasional stories about America's dependence on debt. The next article in the series will describe how local governments have loaded up on costly loans. To read previous installments, go to latimes.com/debt.