Millions of college students apply for private loans to finance their education every year, and the majority who do so have not first exhausted their federal financial-aid options, including government loans. A new report released today by the Project on Student Debt highlights the best practices of colleges that use their certification process for private loans to educate students about their risks and help them identify when they can access more federal assistance.
"I think one of the biggest take-aways of this report is that when colleges learn that a student has applied for a private loan, they have a critical and time-sensitive opportunity to help students make informed decisions about their options," said Matthew Reed, a program director for the Institute for College Access & Success, which runs the project, and the author of the report, "Critical Choices: How Colleges Can Help Students and Families Make Better Decisions About Private Loans."
Mr. Reed examined what 22 varied institutions do between the time that financial-aid officers are contacted by private-loan companies about a student's application and the time that student accepts a private loan.
Unlike federal loans, private loans often carry variable interest rates and offer fewer or no protections for graduates whose circumstances limit the payments they can afford. As a result, Mr. Reed said in an interview with The Chronicle, "There's a universal agreement among experts and financial-aid officers that students should use all federal aid available to them before accepting any private loans."
The report made recommendations based on which practices caused students and their families to maximize federal loans before accepting private ones and even showed how to avoid taking out private loans altogether.
Colleges are advised to:
- Require counseling, preferably by phone or in person, for all private-loan applicants if possible, but especially for those who have not exhausted their federal-aid options.
- Create formal policies to reduce the number of students who use private loans.
- Omit information about private-student loans in financial-aid offers.
- Track policies that seek to reduce private-student loan borrowing and share promising practices with colleagues at other colleges.
One class of private loans, uncertified loans, do not require lenders to contact colleges about students' enrollment or the cost of their education. The report urges financial-aid offices to work with the bursar's office to identify students who make payments with uncertified private loans and "quickly contact and counsel the borrowers."
Mr. Reed said many different types of colleges already followed these practices, and the report highlighted large public colleges and small private colleges alike. San Diego State University, the report said, reduced by half the number of students who accepted private loans by, among other actions, requiring students to take an online-counseling course starting in the spring of 2010 and to complete a Free Application for Federal Student Aid before it would certify their private loans.
Mr. Reed said practices like these are critical, particularly as the economy emerges from the credit crunch that drove down the use of private loans in recent years. "The overall market is issuing signs of growth again," he said.
