Private lenders made loans from 2005 to 2007 with little consideration for whether borrowers could repay, the Consumer Financial Protection Bureau and U.S. Department of Education said in a joint report to committees of both houses of Congress.
"As a result, many students borrowed more than they needed to finance their education," the report said. "Additionally, during this period, lenders were more likely to originate loans to borrowers with lower credit scores than they had previously been.
"These trends made private student loans riskier for consumers," the report said.
The practice took place at the tail end of the housing bubble, when banks lowered lending standards and issued higher-risk mortgage products to homeowners, leading households increasingly indebted beyond their ability to pay when the housing bubble burst.
"Fueled by investor appetite for asset-backed securities, the private student-loan market grew from less than $7 billion in 2001 to over $20 billion in 2008, before contracting to less than $7 billion in 2011," the report said.
CFPB Director Richard Cordray asked Congress to enhance the role of schools in the private student loan origination process and to modernize the regulatory framework so student consumers "fully understand their debt obligations and lenders have appropriate data to make underwriting decisions."
Education Secretary Arne Duncan asked Congress to require colleges, universities and private education lenders to "work proactively to protect and inform private student loan borrowers" work with the DOE and CFPB "to determine how to afford greater flexibility and relief to private student loan borrowers who are experiencing financial distress."
He recommended the DOE and CFPB "work with Congress to identify the necessary resources to provide a comprehensive picture of student borrowing that is inclusive of both federal and private student loans."