With private loans fast becoming an essential tool for many students trying to finance a higher education, federal policy makers need to more fully examine the impact that such borrowing is having on financially needy students, the Institute for Higher Education Policy says in a new report.
Released last month, the report, “The Future of Private Loans: Who Is Borrowing and Why,” seeks to provide detailed information on who is using private student loans and why.
“While private loans are comparatively a small portion of all aid for some groups of students, they are becoming increasingly important,” Jamie P. Merisotis, the institute’s president, said in a news release accompanying the report. “Given the fact that experts are predicting private lending will continue to grow,” Mr. Merisotis said, “it is important to chart a reasoned debate about private loans and their potential benefits and risks for students in the future.”
Private loans are the fastest-growing form of student aid today. In the 2005-6 academic year, lenders provided about $16-billion in private loans, a 1,042-percent increase from a decade earlier, the report says. That rate of growth is more than 10 times as steep as the rate for federal student loans over the same time period.
Some loan-industry officials expect that within the next 10 years, the total volume of private loans will eclipse that of the federal loan programs, which have handed out more than $60-billion this year.
Historically, private loans — which almost invariably carry far-less-attractive terms and conditions than loans backed by the federal government — have gone to graduate and professional students, particularly those pursuing careers in high-paying fields like law and medicine. But over the last decade, private lenders have been aggressively marketing their loans to undergraduate students.
According to the report, most undergraduates take out private loans only after they have reached the borrowing limits in the federal student-loan programs — $3,500 for freshmen, $4,500 for sophomores, and $5,500 for juniors and seniors.
But the report notes that 20 percent of traditional-age students with private loans had not taken out federal loans at all, and an additional 19 percent had federal loans but had not borrowed up to the federal limits.
Pointing Out Pitfalls
There are a variety of reasons why students may take out private loans before exhausting their eligibility for federal loans, the reports says. For example, some may not qualify for federal loans because they attend college less than half time.
But the report’s authors worry that some financially needy students are taking out private loans exclusively because they do not understand the full range of financial aid that is available to them.
“Not everyone receives perfect information about financial aid,” the report says, “and some studies have found that students with the least information are often those from low- and modest-income backgrounds.”
Such students are particularly vulnerable, the report says, because private-loan providers are increasingly marketing their loans directly to students, rather than through college financial-aid offices that could help guide them through the process.
In their marketing materials, some companies stress the complexity of applying for federal financial aid and the relative ease of applying for private loans online.
Drawbacks for borrowers
The report identifies several drawbacks that borrowers of private loans may encounter. Among them:
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The interest rates lenders charge on private loans are not fixed or capped at artificially low levels, as is the case with government-backed loans. Instead, the interest rates on private loans tend to vary from month to month, based on market conditions. So even “an initially low interest rate may increase” significantly over the life of the loan, the report says.
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The interest rates students pay on private loans, unlike federal loans, vary based on borrowers’ credit ratings. As a result, low-income students tend to pay significantly higher interest rates than more affluent ones.
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The repayment options that the government provides for borrowers who are struggling to repay their debt are much more generous than the options private-loan providers offer. For example, borrowers in the federal programs who become unemployed or suffer economic hardship have a legal right to have their loans deferred for up to three years without having interest accrue during that period of time.
“The need for targeted outreach to these students to ensure they are receiving comprehensive information about the pros and cons of private loan borrowing is critical,” the report says.
http://chronicle.com Section: Government & Politics Volume 53, Issue 18, Page A22
