Jeff McTabor

Private Student Loans Being Used More Often to Pay College Costs

According to a new report issued by The Project on Student Debt, one-third of all college students who graduated in 2009 were carrying private student loans, and private student loans accounted for nearly one-fourth of all student loan volume in 2007-08. College students who graduated with private student loans owed about $12,500 in private loan debt.

Private student loans are credit-based, non-federal college loans issued by banks and private lenders. Unlike with government-issued college loans, the federal government does not guarantee private student loans and does not regulate the industry outside of standard lending laws.

Whereas federal student loans carry fixed interest rates, private student loans are typically variable-rate loans, with generally higher interest rates and without the flexible repayment options and borrower protections offered by federal loans.

The Project on Student Debt compares private student loans to credit cards insofar as the high, variable interest rates and the associated risks to borrowers.

In compiling student loan debt data for its report, The Project on Student Debt found  that students who received additional financial aid counseling from their school about the availability of federal financial aid — which includes federal grants and low-cost federal student loans — tended to take out fewer private student loans than those students who did not receive such counseling.

This finding, say the researchers, suggests the need for more financial aid counseling at the school level. Students can benefit from financial guidance regarding college loans and college loan debt, and researchers at The Project on Student Debt recommend that financial aid counseling specifically address the differences between federal student aid and private student loans.

The report, “Student Debt and the Class of 2009,” is the latest issue in the annual survey published each fall by The Project on Student Debt, an initiative sponsored by the Institute for College Access & Success (ICAS), an independent nonprofit organization dedicated to making higher education more affordable and available to students of all backgrounds.

In addition to its proposal for expanded financial aid counseling for students, this year’s report makes additional recommendations aimed at providing students and schools with more complete and better accessible student loan data and information about student loan debt loads:

• Institute the uniform collection of total student loan debt loads for all undergraduate students, not just first-year enrollees. A current annual federal financial aid survey of colleges collects student loan debt information only from entering first-year students and only for government-issued college loans; student debt from private student loans isn’t included.
  
  

  Cumulative data on total student loan debt loads for graduating students, which should include annual borrowing volume for both federal and private student loans, says ICAS, are needed to create a truer picture of the cost of college and the extent to which students are taking on student loan debt to pay for college.



• Require private student loans to be “certified” by the school. Such a certification would require colleges and universities to verify a student’s enrollment status and financial aid eligibility before a lender could disburse any private student loan dollars. The certification process would allow each school to counsel students on their remaining eligibility for federal student loans and other potential alternatives to private student loans.
  
  

  Both private lenders and the National Association of Student Financial Aid Administrators support this type of certification, and most currently available private student loan programs offer only school-certified private student loans.



• Require that private student loans be entered into the National Student Loan Data System. The National Student Loan Data System (NSLDS), which offers students online access to their full profile of federal grants and student loan borrowing history, currently contains information only on government-issued student loans. No similar centralized database for private student loans exists. ICAS notes that the new Consumer Financial Protection Bureau, created under the Obama administration’s financial reform legislation, has the rulemaking authority to require the entry of private loans into the NSLDS.
  
  

  Instituting such a policy, says ICAS, will enable the consolidation of all student loan debt data for a single borrower. Student borrowers would be able to see, within a single location, their total current college loan debt load from both federal and private student loans and would be able to use that information to inform any further borrowing decisions.
  
  

  In addition, the inclusion of private loans within the NSLDS would allow colleges and universities to assess the rate at which their students are using private student loans to pay for tuition and living expenses while in college. Knowing the uptake rate of private student loans may help colleges and universities make more scholarships and grant aid available to students or encourage schools to reduce the overall cost of attendance.



• Make every school’s student loan repayment rates and graduate debt-to-income ratios publicly available. Currently, a proposed federal regulation would require this data only from for-profit colleges and other programs that incur high student loan debt rates and also have low post-graduation student loan repayment rates.
  
  

  Collecting and publishing student loan repayment rates, student loan debt loads, and graduate debt-to-income information for all programs that prepare students for gainful employment, not merely a select troubled few, says ICAS, would provide a more accurate picture of program costs among higher education institutions as well as of the likelihood of finding gainful employment following graduation.



• Include student loan debt loads and borrowing trends from students who start but do not finish their degree program. Students who drop out of college before attaining their degree are at a significantly higher risk of defaulting on their student loans. The inclusion in federal financial aid surveys and databases of student loan debt information from all student borrowers, regardless of degree attainment, says ICAS, will provide a truer picture of student loan debt loads  and default risks associated with particular schools and programs and may allow students to make more informed choices when they select a degree program.

 college loans, report: Student Loan Debt and the Class of 2009, National Student Loan Data System

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