Education Funding

College Students Use Private Loans to Meet Growing Tuition Bills

By Alyson Klein — October 03, 2006 3 min read
  • Save to favorites
  • Print

As college tuition costs continue to rise, more students are relying on private loans to cover their expenses, sometimes instead of those subsidized by the federal government.

Some policy analysts applaud the burgeoning private-loan market for improving college access and offering students a streamlined, user-friendly approval process. But others worry that such loans benefit only well-to-do students and families with good credit histories, leaving others vulnerable to lenders who might take advantage of them.

“Is this good or bad? I think it’s both,” Frederick M. Hess, the director of education policy at the American Enterprise Institute, a Washington think tank that emphasizes free-market approaches to public policy, said about the rise of private loans. The organization held a conference here last week on the private lending market.

College Aid: Public vs. Private

While government-subsidized college loans are the largest share of the market, private loans are becoming more prevalent.

*Click image to see the full chart.

Click to enlarge: College Aid: Public vs. Private

SOURCE: College Board

“It’s good because financial-aid forms are incredibly complex, are incredibly intrusive,” Mr. Hess said. “These guys [private lenders] are in the business of making loans as simple as possible.”

He said private lenders are in a position to test innovative practices that could later be used by federally subsidized and government lenders to make taking out college loans easier.

But he added that, with private lenders, “there’s a risk that kids are going to take more loans than they should to go to college; that these guys are going to take advantage of vulnerable populations.”

At the conference, held Sept. 25, some higher education experts noted that student borrowing, from both private and government lenders, has expanded in recent years, in large part because of the rising costs of college tuition.

For instance, during the 1989-90 academic year, 36 percent of full-time, full-year undergraduates took out loans. By 2003-04, that number had jumped to 50 percent, according to the U.S. Department of Education’s National Center for Education Statistics. In the past five years, tuition and fees at public universities have risen 40 percent, after adjusting for inflation, according to the College Board.

Alternative loans are becoming a growing share of the higher education market, in part because the borrowing limit for federally subsidized Stafford loans for dependent students is capped at $23,000, an amount that has not increased since 1992, despite rising tuition costs.

From the 1996-97 school year to the 2004-05, the proportion of nonfederal loans jumped from 6 percent to 18 percent, according to the College Board, the New York City-based higher education organization.

Consumer Aid Sought

For some students, the private-loan market has stepped in to make up the difference between government-subsidized loans and tuition costs, according to Christopher Mazzeo, a former senior policy analyst for the National Governors Association Center for Best Practices and now a New York City-based independent consultant.

Mr. Mazzeo said in a draft paper exploring the issue for the AEI that during the 2003-04 school year, more than 50 percent of undergraduates who had private loans had also borrowed the maximum Stafford loan for which they were eligible, according to NCES data from the National Postsecondary Student Aid Survey that he analyzed. Stafford loans are offered through both the federal direct-lending program and through private lenders.

Mr. Mazzeo noted that about 23 percent of students who took out private loans during 2003-04 did not take the maximum Stafford loans available to them. He said those students may not have realized how much money they could borrow under the federal program, or may have found private loans that offered better terms than the federal ones.

Another 23 percent of the students in the data Mr. Mazzeo analyzed sidestepped the federal loan program altogether, taking out only a private loan. Those students might have been ineligible for federal loans due to their immigration status or prior default, he said.

But in some cases, students and parents may choose private loans just because they are mystified by the federal financial-aid process.

Catherine Reynolds, the chief executive of Educap Inc., a Sterling, Va.-based concern that provides private student loans, said her company works to ensure “customer delight”—a smooth, transparent approval process for students and their parents.

“The federal programs are complicated and confusing,” she said. “We hear over and over again from consumers, can you tell me how to do this?”

Managing Editor for Special Projects Lynn Olson contributed to this report.
A version of this article appeared in the October 04, 2006 edition of Education Week as College Students Use Private Loans to Meet Growing Tuition Bills

Events

Recruitment & Retention Live Online Discussion A Seat at the Table: Chronic Teacher Shortage: Where Do We Go From Here?  
Join Peter DeWitt, Michael Fullan, and guests for expert insights into finding solutions for the teacher shortage.
This content is provided by our sponsor. It is not written by and does not necessarily reflect the views of Education Week's editorial staff.
Sponsor
Science Webinar
Close the Gender Gap: Getting Girls Excited about STEM
Join female STEM leaders as they discuss the importance of early cheerleaders, real life role models, and female networks of support.
Content provided by Logitech
This content is provided by our sponsor. It is not written by and does not necessarily reflect the views of Education Week's editorial staff.
Sponsor
Student Achievement Webinar
Mission Possible: Saving Time While Improving Student Outcomes
Learn how district leaders are maximizing instructional time and finding the best resources for student success through their MTSS framework.
Content provided by Panorama Education

EdWeek Top School Jobs

Teacher Jobs
Search over ten thousand teaching jobs nationwide — elementary, middle, high school and more.
View Jobs
Principal Jobs
Find hundreds of jobs for principals, assistant principals, and other school leadership roles.
View Jobs
Administrator Jobs
Over a thousand district-level jobs: superintendents, directors, more.
View Jobs
Support Staff Jobs
Search thousands of jobs, from paraprofessionals to counselors and more.
View Jobs

Read Next

Education Funding 6 Lawsuits That Could Shake Up How States Pay for Schools
Far removed from annual budgets, these lawsuits hold the potential to force states to direct more funds to their schools.
6 min read
Large white hand holding a weighing scale with a bag of money on one side and books with floating letters on the other side showing a balance of knowledge and money
iStock/Getty
Education Funding States Are Rolling in Surplus Cash, But It's Not All Good News for Schools
Some states are ramping up education spending, while others are leaving districts disappointed.
7 min read
Illustration of a man holding oversized money.
Nuthawut Somsuk/iStock/Getty
Education Funding Education Equity Expert: 'We've Gotta Give Up the Notion of Local Control'
David Sciarra, stepping down as head of the Education Law Center, says states have been let off the hook in the push for education equity.
8 min read
David Sciarra, executive director of the Newark-based Education Law Center, an advocacy group for children in low-income cities, looks at paperwork during a hearing in a school funding case before the New Jersey Supreme Court in Trenton, Wednesday, April 20, 2011.
David Sciarra, executive director of the Newark-based Education Law Center, an advocacy group for children in low-income cities, looks at paperwork during a hearing in a school funding case before the New Jersey Supreme Court in Trenton, Wednesday, April 20, 2011.
John O'Boyle/AP/Pool
Education Funding How School Funding Falls Short, by the Numbers
See how states measure up in an annual report on state school funding and equity.
1 min read
A white man looks up as he leans on a red ladder against a tall stack of coins
E+/Getty