As prospective college students look ahead to the challenges of paying for school, Dan Davenport has three numbers for them:
Forty-five hundred. Twenty. And $22,303.
In order, that’s the amount of an unsecured private student loan a University of Idaho student took out recently, the number of years of repayment, and the total eventual cost – more than three times the cost of a federally backed loan.
Such figures are frustrating but not surprising for Davenport, head of financial aid at UI, and other college officials. They say that more students and families are turning to such “alternative loans” to pay for college, in part because federal student aid hasn’t kept up with costs and in part because aggressive marketing by lenders convinces some students that they’re better off avoiding the hassles of applying for federal loans.
“It is growing,” Davenport said. “It is growing faster than we would like for it to grow.”
Last year, private loans accounted for nearly a quarter of all college loans, and experts expect that to keep rising as college gets more expensive and the various forms of government financial aid lag behind. A decade ago, private loans made up just 7 percent of college borrowing, according to a recent report by the College Board.
College officials are concerned about the trend for several reasons. Private loans are typically a worse deal for students, they say, charging higher interest rates and offering less favorable terms. The loan cited above had an interest rate of 13.4 percent – higher than average for such loans, which often start at 8 percent or 9 percent. Federal Stafford loans, by comparison, charge 6.8 percent.
With the average student loan debt approaching $20,000, the differences in interest, repayment and deferment schedules can have a huge impact.
‘Be very wary of marketing’
If students have maxed out their financial aid packages and have no other options, private loans may be needed, financial aid officers say. But often, lenders convince students that applying for their loans is easy and quick, and they capitalize on the belief among some families that qualifying for federal aid is difficult.
Such pitches may be particularly appealing over the next couple of months as families begin to fill out the FAFSA – the Free Application for Federal Student Aid – which will determine how much they receive in grants and loans.
“We’re seeing some students and parents who specifically don’t want to go through the whole process of filling out the FAFSA,” said Bruce DeFrates, director of financial aid and scholarships at Eastern Washington University. “They just see the whole process as a hassle and they want to bypass it.”
Some criticize private lenders for not making sure their borrowers know much better deals are available to everyone – regardless of financial need – at least up to federal limits. Davenport said that federal loan limits, between $3,500 and $5,500 a year, haven’t risen as fast as tuition and other costs. But in some cases, students go the private route without exhausting their federal loans.
“The private lenders have found another niche where they can do a substantial amount of direct marketing to students,” he said. “They’ve just bypassed the financial aid office.”
Sallie Mae, the nation’s largest college lender, provides a lot of information for students and families regarding college financing. Beth Guerard, a Sallie Mae spokeswoman, said her organization presses families to apply first for “free money and cheap money,” in the form of federal loans, and seek out private loans “only as a last resort.”
She said students should be wary of claims that emphasize how quick and easy borrowing can be.
“Any time you take out a loan you must know it’s going to have to be repaid,” she said. “I would say be very wary of marketing campaigns and make sure to do your own research.”
As a portion of all student aid, private loans represent a relatively small piece of the pie. But it’s growing rapidly, and recent changes in the federal loan program are likely to drive even more private borrowing, EWU’s DeFrates said.
Congress last year passed changes to the student aid program that eliminated subsidies to lenders and transferred that money to the Pell Grant program – a move that drew support because the grants help offset college costs for low- and middle-income students. But without the subsidies, lenders have less financial incentive to promote federally backed loans and more to pursue higher-interest loans, financial aid officials said.
Large lenders may still offer the federal loans, but they don’t always emphasize them in marketing to students, DeFrates said. And then there are many companies that specialize in the private loans – often the ones pushed most heavily in TV ads – who tend to downplay anything about federal loans while screaming the praises of the private ones, officials said.
At the UI, Davenport says, about 14 percent of all student borrowers took out private loans, at an average of $11,000. That’s only about 100 students, but Davenport said that number has been growing significantly each year.
At EWU, which tracks the figures differently, the scope of private borrowing is greater. Roughly 6 percent of the total student body, or 558 students, has borrowed about $3 million via alternative loans this year, DeFrates said.
At private schools such as Gonzaga University, where tuition is higher and some wealthier families may mistakenly assume that they won’t qualify for federal aid, the use of private loans is higher still. Eight percent of GU undergraduates have private loans, according to the financial aid office.
GU’s director of financial aid, Darlene Hendrickson, said the easy access to private loans can be used by students for expenses that may not be strictly educational.
“They can borrow as much as they want,” she said. “We see a lot of students who don’t live like students while they’re students.”
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