Education Funding

College Students Use Private Loans to Meet Growing Tuition Bills

By Alyson Klein — October 03, 2006 3 min read

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

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