Private Loans and Choice in Financing Higher Education - College ...

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Private Loans and Choice in Financing Higher Educationstudents and the institution, aid administrators face the challenge of balancing thegoal of limiting students’ debt burdens with the need to facilitate choice in students’financing options.◗Perceptions of students and parents. Students and parents have their own pointsof view which take into account perceptions of debt, choices of institutions andenrollment patterns, and trade-offs among financing options. These perceptionsimpact the types of students who obtain private loans, as well as the reasons thosestudents (and parents) decide to borrow.This report explores the issue from these various perspectives in order to advance thediscussion of private loan borrowing. The report draws upon nationally representativedata, including the National Postsecondary Student Aid Study (NPSAS) and theSurvey of Undergraduate Financial Aid Policies, Practices, and Procedures(SUFAPPP), along with data from the College Board and the Greentree Gazette, a businessmagazine for higher education. In addition, the report presents new, originaldata from a survey of student financial aid administrators and from focus groups withfinancial aid professionals and lenders across the country.Key findingsDifferent sources of research data lead to the same inescapable conclusion: the use ofprivate loans is a growing part of college financing. Estimates from various data sourcessuggest that total private loan volume is now at least $5 billion to $6 billion per year andhas been increasing rapidly since the mid-1990s. Put another way, the total volume ofprivate loans has now surpassed the amounts awarded annually under the Federal StudentEducational Opportunity Grant (FSEOG), Federal Work-Study, and the Federal PerkinsLoan programs combined. Nevertheless, private loans still comprise only a small portion,about 10 percent, of total student loan volume. Overall, only 4 percent of undergraduatestudents, 3 percent of graduate students, and 16 percent of professional students (such asthose in medicine, dentistry, and law) borrowed private loans during 1999-2000. In comparison,28 percent of undergraduates, 23 percent of graduate students, and 74 percent ofprofessional students borrowed federal student loans (NCES 1999-2000).The incidence of borrowing private loans varies among types of students.The groups most likely to borrow private loans include: 1) traditional undergraduatesat relatively high priced, private four-year institutions; 2) undergraduates who facevery high non-tuition costs, such as room, board, and other living expenses; and 3)professional students, particularly law school students, who face high tuition pricesand have high financial need. This is especially true for those students who borrowedthe maximum Stafford loan amount for which they were eligible.One of the most important findings of this study is that private loans appear to befacilitating institutional choice for students who have reached the limits of other types offinancing, including federal student loans. That is, private loans help students attendthe schools that they want to attend, rather than schools that they might have to attendbecause of inadequate financial resources. Financial aid administrators interviewed forviii
Private Loans and Choice in Financing Higher Educationthis report emphasized high financial need as an important reason for borrowingprivate loans. In many cases, high financial need is more often a function of the highprice of attendance at a particular institution rather than low ability to pay. In addition,high need may also be related to inadequate levels of financial aid, including federalstudent loan limits. Considered together with the evidence on the characteristics ofstudents who use private loans, the ability to obtain private loans allows many studentswith high financial need to choose the institutions or programs they want.The study also found that private loan and federal student loan borrowing are closelyinterconnected. Many lenders base private loan terms and conditions on the broadermarket of student loans, especially federal student loans. In addition, changes in institutionalpractices concerning private loans have resulted from financial aid administrators’experiences with federal student aid and the borrowing limits in the federal programs.Perhaps most important, a high proportion of private loan borrowers also obtainedfederal student loans, and in many cases borrowed up to the federal loan limits. In 1999-2000, 77 percent of professional students, 50 percent of undergraduates, and 32 percentof graduate students who borrowed private loans had also borrowed the maximum totalStafford loan amount for which they were eligible. In comparison, among those who didnot borrow private loans, 40 percent of professional students, 13 percent of undergraduates,and 4 percent of graduate students were at the Stafford total loan limits.It is likely that if the federal loan limits were increased, a significant proportion of thestudents who are currently receiving private loans would obtain more federal loans instead,at least in the short term. At the same time, it is important to note that some privateloan borrowers were not at the federal loan maximums—that is, they did not borrow themaximum amount for which they may have been eligible, or they did not borrow anyStafford loans at all. This may be because they were not eligible for federal student loans,or because they chose not to finance their higher education from federal aid sources.Finally, while the vast majority of students do not appear to be borrowing excessiveamounts, there are a few specific groups of students for which private loans may becontributing to unmanageable debt burdens. For example, almost two-thirds of lawschool students with a certain set of characteristics—those enrolled at schools thatcharged at least $10,000 in tuition, who faced financial need of $10,000 or more, andwho borrowed the maximum Stafford loan for which they were eligible—requiredprivate loans to help meet their total costs of attendance in 1999-2000. Given the highcosts of their specific programs, these students often must supplement federal loansdespite the relatively high limits of $18,500 annually and $138,500, cumulatively (includingundergraduate loans) in the Stafford loan program. Although high salaries in thefuture may cover the extra burden, such salaries are not guaranteed and some of thesestudents may run into financial difficulties or be deterred from following certain careers.Other findings of interest◗In 1999-2000, professional students borrowed an average amount of $10,076, whileundergraduates and graduate students borrowed $5,100 and $9,140, respectively.ix
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Chapter 5Why Do Students Obtain Pri
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ReferencesA Report of the ABA Stude
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