August 21, 2007

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

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

Comments

1. One of the reasons students and parents were required to complete the FAFSA to obtain Stafford Loans was because students were completing the Stafford applications and foregoing the FAFSA because it was easier even though they were also foregoing the Pell Grant. Requiring Stafford Loan borrowers to first complete the FAFSA resulted in many more students being eligible for Pell Grants.

   The FAFSA should be required for private loans or the school should be required to package a private loan equal to cost of education less estimated eligibility for Stafford.

   — Fred    Aug 22, 05:55 AM    #

2. Many people forego the fafsa because it is intrusive and requires a good deal of effort to complete. Parents and students should be able to opt out of the fafsa process if they choose to do so without losing eligibility for unsubsidized federal loans. There should be a simple “opt-out” form that a student and/or parent can complete to show that they have made a decision to stay out of the fafsa process.

   Asking the schools to intrude into the private financial affairs of the parent is silly. Adults should be able to make their own financing decisions without interference from the government or the educational institution.

   — Steve    Aug 22, 08:24 AM    #

3. If school didn’t cost so much, private loans wouldn’t be as necessary. I don’t understand why the spotlight isn’t on tuition increases.

   — mel    Aug 22, 08:36 AM    #

4. Might we not be overselling the argument that many private loan borrowers forego cheaper federal loans in lieu of private loans? While the data shows that there are some private loan borrowers who might go this route because of a simpler process, the reality (according to the ACE report) is that this is a fairly small percentage of private loan borrowers (50% of the one in five who don’t file a FAFSA, or 10%).

   There are other more important reasons that students take out private loans. Included among these reasons are: 1) other financial assistance is inadequate, so private loans are used to meet “unmet need”, 2) parents (noting that most private loan borrowers are dependent students) are either unable or unwilling to absorb the family contribution responsibility, so the burden of covering that amount is shifted to the students, 3) parents are denied PLUS Loan eligibility but their students may be able to get a private loan, and 4) the principal payment deferment terms of private loans make them more attractive to parents (on the surface) than PLUS Loans. The increased practice of direct to student marketing will only serve to increase private loan volume.

   — Jeff Zellers    Aug 22, 09:07 AM    #

5. I’ve used private loans for my children because according to FAFSA, my family should be able to pay the $20K each for the two children we have in college-in other words, we have no need. so we are not eligible to receive government-backed loans and we need the private loans to cover what we absolutely cannot pay.

   — andy    Aug 22, 09:10 AM    #

6. Students who do not meet certain GPA requirements (not sure on the exact GPA here) are not eligible for federal aid, and therefore have to seek out private loans through their banks, or through some other private lender. It goes without saying why these students wouldn’t fill out a FAFSA. Perhaps if colleges looked at recent academic progress instead of the whole picture of a student’s career (it only takes one or two bad semesters to ruin a GPA for an entire college career), then students wouldn’t have to turn to more expensive private loans.

   — Courtney    Aug 22, 09:32 AM    #

7. The FAFSA is easy to complete if you take an hour or so and read everything. And, almost every financial aid office in the nation will complete the form for you if you ask (even if you are not planning to attend that school). As a former financial aid professional, I can tell you first hand that far too many parents would rather pay someone to explain everything rather than do the necessary leg work to figure everything out. Its not easy, but its not hard either.

   — Jason    Aug 22, 09:41 AM    #

8. Response to Andy’s previous comment.

   When completing a FAFSA they will use your income to determine the TYPE of Stafford loan you are eligible to receive (subsidized vs. unsubsidized). However, as long as a student is a U.S. citizen and is not in default they are eligible for Stafford loans (regardless of income level) it just varies on the type of loan, either Subsidized or Unsubsidized. If a student is determined to have a high EFC (expected family contribution) they may only be eligible for unsubsidized Stafford loans, but the overall amount in federal loan eligibility does not change. The interest rates for a private loan (9 – 15%) tend to be much higher than federal Stafford loans (6.8%).

   — Zac    Aug 22, 09:47 AM    #

9. Many students have divorced parents, neither of them willing to assist by filling out their financial information. When I worked in a Financial Aid Office, I saw so many issues of non-support. What these parents don’t realize is that they cut off the chances of their kids getting “free” or government subsidized money by refusing to fill out the form. Private loans at least give the student a chance to attend.

   — Dianne    Aug 22, 10:25 AM    #

10. Comments # 5 and 6 are especially worrisome. There is no GPA requirement for receiving federal aid (except that students must be making “satisfactory progress”). Parents of undergraduate students are eligble for Federal PLUS Loans regardless of income or the results of the FAFSA need analysis. The federal government must do a better job of debunking these “myths”.

    — Scott    Aug 22, 10:26 AM    #

11. What FAFSA offered was ridiculously low! It wouldn’t have covered my books each year. They based it on my parents’ combined income, but my parents weren’t paying for college – I was. It didn’t take into account the cost of living for my parents, the debt they were in or the fact that they were caring for my paternal grandparents. What it said they could pay each year was entirely inflated. And in the end, my parents wanted ME to pay the loans so there income really didn’t matter. Now I’m drowning in debt from a private loan company. I didn’t want to go that route, but to go to the college that I thought would best prepare me for my chosen career I did what I have to do. And I’ll be paying for it for a very, very long time.

    — KD    Aug 22, 10:29 AM    #

12. re: Comment #11 The FAFSA does not fund the loans. It’s information for the school to use to calculate the award. Too many people are under the assumption that it’s either the government loans or the private. The best is to get as much “free money” as possible in the form of scholarships and grants, apply for the government loans and then fill in the balance with private loans. Students would not apply for scholarships, because they were $500 or $1000 each. But I knew of at least one graduate student who funded all of her education with several scholarships. With search engines and computers to help apply, it should be easier than ever. However, in my experience, most students took the quickest route…getting a private loan…and didn’t worry about the consequences until later. You do pay a premium for fast in almost every aspect of our daily life. Take the time to fill out the FAFSA, apply for scholarships, work part-time…it will save you thousands of dollars down the road.

    — Dianne    Aug 22, 11:52 AM    #

13. FAFSA loans do not offer enough to cover college costs. Additionally, there is nothing but private loans offered for grad school.

    — Barbara    Aug 22, 12:27 PM    #

14. Barbara~
    You can certainly apply for GRAD PLUS loans – a federal loan specifically designed for Grad School!

    — Sarah    Aug 22, 12:49 PM    #

15. Additionally, you can receive Stafford subsidized and unsubsidized loans as a graduate student (the limits are a little bit higher than for undergrads).

    — CM    Aug 22, 01:16 PM    #

16. I returned to school because even though I was working full time, and even though I was single, AND even though I had NO debt other than a mortgage, I was unable to keep from losing my house. I DID fill out the FAFSA, but I was never approved for a student loan that would cover the entire cost. There was NO EXPLANATION of the different types of loans and their consequences (it was recently discovered that the university I attended was receiving kickbacks for steering borrows to the private lenders). As for scholarships, I spent hour upon hour in the public library trying to find ANY scholarship that I would qualify for (at that time I considered it my second job). I came from abject poverty, the first in my family to own a home, and to graduate from high school, let alone college. I have a history of PTSD due to childhood abuse (diagnosed shortly before earning my degree, because of the difficulty I was having). While I was growing up I was not out there participating in the usual things that qualify most people for scholarships—I was just trying to survive. Whoever thinks scholarships are easy, free money, does not understand all of the issues of those who NEED them the most. Yeah, I took out loans not knowing the full consequences I would later be facing. And now I am being blamed for not knowing what I was never told. It’s the old attitude that I should be able to pull myself by my boot straps, but they ignore that I was never given boots in the first place, let alone boots with boot straps. When are we going to start talking about the need to provide a good, free and COMPLETE (meaning college) education to everyone?

    — Mid-Life Female student    Aug 22, 02:51 PM    #

17. I am amazed at the laziness and whining attitudes of students these days. I have worked in a financial aid office for years, and I have met every kind of student you can imagine, even the ones you don’t dare imagine. What I realized was that those students with a true desire to get their degree and improve their lives were the ones that didn’t whine and complain. Instead, they used that time to get an extra job, or get involved with the school in a club or student government or the volunteer office and found scholarship money or tuition waivers. I also have realized that the only obstacles that exist are not external; only internal. There is always a way, no matter what your circumstance, to make it through college. My parents lived out of the country as religious missionaries (which means they had just enough for themselves and not enough to help me or my siblings with money for school) when I went to college. I found a way, and I have counseled many others who have also found their way. Oh, it’s very possible, but it is up to you! I did an activity one time with a group of students where I placed a tissue on the ground next to a garbage can. I then asked a student to yell at it and whine to it and complain to others about as much as they could to see if it would ever get into the can. Well, of course it didn’t. I then asked a student to lean over, pick it up, and put it in the can. It took less than 2 seconds and they went on their way. The reaction of the audience was great as the students realized that their own actions determine the outcome.

    — Scott    Aug 22, 04:54 PM    #

18. whatever. i see no problem with this. i am about to take out some loans…FAFSA takes a long time to get processed…dealing with school financial aid is a hassle…

    if kids are getting into debt…that should be the worry of the company giving out the loans, shouldn’t it?

    — mark kolkin    Aug 23, 03:44 AM    #

19. Good Grief — What a lot of unfortunate misinformation – and I don’t think the people who are writing after the explanations are given are any better informed than the earlier writers! As the parent in a relatively “high income” (i.e., not elgible for financial aid) family, I thought it was annoying, intrusive, and (the first time) complicated to fill out the FAFSA just to be able to get UNSUBSIDIZED student loans and Parent PLUS loans, but it was a lot cheaper than private loans! Based on how highly educated most of these responders probably are, I would guess that an extremely small proportion of the population as a whole understands this at all.

    — jane    Aug 31, 05:36 PM    #

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