Why Do Students Choose Costlier Private Loans? Report Outlines Their Reasons

August 21, 2007

One in five undergraduates who take out private loans forgo less-expensive federal loans, according to a new analysis released today by the American Council on Education.

The analysis, titled “Who Borrows Private Loans?,” offers several possible explanations for why students would shun federal loans, which typically offer lower interest rates and more-flexible repayment options.

It says that students may have been attracted to the application process for private loans, which tends to be simpler than completing the eight-page Free Application for Federal Student Aid, known as a Fafsa. According to the analysis, half of the borrowers who took out private loans exclusively did not even file a Fafsa.

Alternatively, students may not have been aware of the differences in cost between federal loans and private loans, the report says.

Private loans are the fastest-growing form of student aid today. In 2005-6 borrowing through private-loan programs totaled $17.3-billion.

Robert M. Shireman, executive director of the Project on Student Debt, said the analysis “underscores the need for the federal government to take action to rein in private student loans.” Last month the U.S. Senate passed a bill that would require private lenders to provide prospective borrowers with more-detailed information about the terms and conditions of the private loans they offer, and to notify them of their eligibility for lower-cost federally guaranteed loans.

Several of the findings in today’s analysis were reported in a study issued last December by the Institute for Higher Education Policy. However, the ACE analysis provides more-detailed demographic and academic information about private-loan borrowers. —Kelly Field