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

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Private Loans and Choice in Financing Higher Education◗◗◗The challenge for postsecondary institutions is to reconcile their duty to encourageresponsible education debt management with the need to fill classroom seatsand dormitory beds. Financial aid offices should consider providing various formsof private loan counseling based on a student’s borrowing level. Colleges anduniversities with a preferred lender list should consider asking lenders to assistwith the counseling process or stipulating that lenders not approve students forprivate loans without first conferring with the school’s financial aid office.The general public, and postsecondary consumers in particular, also have a responsibilitywhen it comes to understanding financial aid and private loans.Students applying for financial aid should know that they will be responsible forpaying at least a portion of their college costs, and they should familiarize themselveswith the types of financing available, including private loans, along with theterms and conditions associated with these funding sources.Private lenders and guarantors can promote both federal student loan programsand private loans by continuing to advocate that students borrow the maximumfederal student loans for which they are eligible while offering private loans withfavorable terms and conditions to meet any remaining financial need. In addition,private loan providers should remain cognizant of the increased debt burdenmany students are taking on and explore the possibility of working with institutionsto counsel students on borrowing responsibly.Ultimately, private loans represent only a small portion of the total financial aidavailable to students. No one-size-fits-all solution exists that will either make privateloans disappear or eliminate increasing amounts of student debt. Even if federal loanlimits are raised in the HEA reauthorization, private loans will continue to play animportant role in financing postsecondary education, facilitating choice, and providingfinancial support to students when they have exhausted other options.xii
Chapter 1Why Are Private Loans Important?When student and family resources, combined with federal, state, and institutionalfinancial aid, are not sufficient to finance the student’s education,private loans become a viable option to fill the gap. In addition, private loansmay be used to help cover the expected family contribution (EFC) required underfinancial aid formulas, or to pay for additional expenses not normally covered byother forms of aid. Co-signers on many private loans tend to be parents. Private loansare more difficult to monitor than other financial aid sources because they are managedby private lenders and exist outside federal loan programs, although mostlenders offer both federal student loans and private loan products. Private loansusually do not require federal application forms such as the Free Application forFederal Student Aid (FAFSA), which is used to calculate the EFC and students’ level offinancial need. Most private loans are certified (approved and verified) through acollege’s financial aid office, and the funds are sent by the lender to the institution fordisbursement. However, in some cases—such as when a student would like to coverexpenses beyond the cost of attendance—private loans are obtained directly fromlenders and do not go through the financial aid office.Privately funded loans predate the creation and growth of federally guaranteed loans;nevertheless, relatively little is known about private loans at the national level. Theavailable data suggest that they are becoming increasingly important as a mechanismfor financing higher education. By one estimate, the total private loan volume reached$5 billion in 2001-02. This represents a 346 percent increase from 1995-96, when thetotal volume was about $1.1 billion. In contrast, Federal Family Education Loan (FFEL)and Direct Loan volume increased approximately 50 percent ($27.6 billion to $41.3billion) over that time period (College Board 2002). (see Figure 1.1) While the amountof private loans awarded is dwarfed when compared to the total amount of federalloans, the increase in volume nevertheless suggests a significant increase in the demandfor these non-governmental loans. In fact, the total volume of private loans has nowsurpassed the amounts awarded annually under the Federal Student EducationalOpportunity Grant (FSEOG), Federal Work-Study, and the Federal Perkins Loanprograms combined.1
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Chapter 5Why Do Students Obtain Pri
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ReferencesA Report of the ABA Stude
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