About half of the students who go outside of the federal loan programs and borrow private-label loans take on the debt unnecessarily, according to a report this month by the State Public Interest Research Groups’ Higher Education Project.
The report, “Private Loans: Who’s Borrowing and Why,” challenges a central argument of college officials and lobbyists who are pushing lawmakers to raise the limits on what students can borrow from federal loan programs. “There are only a small number of students who are taking out private loans because they have reached their federal loan limits,” says Kate L. Rube, higher-education adviser for the nonprofit advocacy group. “The best way to help those students is with additional grant aid, not more debt.”
For many college lobbyists and financial-aid administrators, Congress will tackle no more important issue than raising the loan limits when it renews the Higher Education Act, which governs most student-aid programs. The law expires this year.
The limits have not been raised in 10 years, and since that time college prices have soared. To keep up, college officials say, more and more students are seeking private-label loans, offered by student-loan providers like Citibank and Sallie Mae, which carry far-less-attractive terms and conditions than those of loans backed by the federal government. Nonetheless, private borrowing by students rose to about $5-billion in 2001-2, up from about $1-billion in 1995-96, according to the College Board.
Federal Capacity
But Ms. Rube calls overblown the argument that borrowers are being forced to take out private loans. To examine the issue more carefully, she sifted through data from a recent survey of college students by the U.S. Education Department’s National Center for Education Statistics. In 1999-2000, it found, while almost 65 percent of college students took out federal loans, only about 4 percent took on private debt. Of those students with federal loans, only about 10 percent also received private loans.
The survey indicated that nearly 24 percent of students with private loans had not taken out federal loans at all, and an additional 26 percent had federal loans but had not borrowed up to the federal limits.
Three-quarters of the private-loan borrowers, the report adds, did not face “unmet need” -- the cost of attending college after all federal and state aid, including loans, has been expended. Ms. Rube concludes that many of these students took out private loans to cover expenses that the federal government expects their parents to pay, or to cover expenses beyond the cost of attending college.
Ms. Rube estimates that about 12 percent of low-income borrowers who have taken out private loans have done so because they exceeded the annual loan limits ($2,625 for freshman, $3,500 for sophomores, and $5,500 each for juniors and seniors). The best way the government can help those students avoid taking out private loans, she says, is to increase grant aid. If that alternative is too expensive, she recommends that Congress create a loan program for low-income students that would charge neither interest nor origination fees.
Ms. Rube says she is alarmed that so many low- and moderate-income students are taking out private loans rather than getting federal loans or borrowing up to the limits in the federal program. “Private loans should be last-resort loans for students,” she says.
Supporters of raising the federal loan limits questioned the usefulness of the Education Department’s statistics, since they are from the 1999-2000 academic year. “There has been tremendous growth in the private-loan program over the last three years,” says Ellen Frishberg, the John Hopkins University’s financial-aid director.
Better Counseling
John Dean, a lawyer for the Consumer Bankers Association, says the report shows that students may need better counseling when taking out loans. But, he argues, that does not make a good case for keeping the federal loan limits in place.
“I continue to find it a mystery,” he says, “why student groups do not support increasing borrowing limits, given that ample evidence exists of students who are reaching their loan limits, and, therefore, turning to more-expensive funding sources.”
The report is available online at the Web site of the State Public Interest Research Groups at http://www.pirg.org/highered.
http://chronicle.com Section: Government & Politics Volume 49, Issue 34, Page A30