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

Private Loans and Choice in Financing Higher Educationinterest rates and the perceived complexity of the FAFSA, some student borrowers aretempted to forgo the federal guarantee in favor of the private loans’ immediate perks.Moreover, private lenders who provide loans for FFEL schools are placed in a difficultposition. They want to capture as much FFEL volume as possible because of its profitability;however, they also do not want to lose any share of the private loan market. Byoffering attractive private loan products lenders risk losing FFEL volume to some oftheir less profitable private loan products. At the same time, lenders that fail to marketappealing private loan products face other risks. One of the major private lenderscommented: “We market our products as a package to schools, even Direct Lendingschools. In essence, we want to market our company and the services we can provideto schools regardless of whether or not they provide us with any Stafford volume.”An increase in borrower diversity also is driving competition in the private loan market.Although many private loan products are widely available, more lenders aretaking advantage of marketing their products to specific audiences. For example,graduate and professional students always have held particular appeal to lenders fornumerous reasons. 23 One well-known private lender recalled, “graduate and professionalschools really gave rise to the private loan market. The schools approachedlenders in the mid-1980s when their students were facing federal loan limits. At a timeof high student default rates, graduate and professional students were considered lessrisky because they already had obtained an undergraduate degree and were likely toenter high-paying fields.”Private lenders have incorporated different methods for capturing a larger share ofthe graduate and professional private loan market. One method is for lenders to splitone of their successful private loan products into several smaller products. For example,one private lender divided its larger medical sciences private loan into separatesmaller loan products for nursing, optometry, dentistry, pharmacy, podiatry andveterinary medicine (Tombaugh 2003). A private lender that tends to cater to graduateand professional students noted that market research has guided the company’sdecisions to grow their product line by introducing either new loan products or subproducts.“We have several specialized products but don’t happen to offer a separateeducation product because there are so many other lenders and products serving thatmarket. Research has helped us strategically plan how we can best serve students andmeet their needs in the market.”Increased competition among private lenders has allowed the number of private loanproducts for graduate and professional students to grow considerably in the periodbetween March 1999 and September 2002. Our analysis found that eight private loanproducts were targeted toward law students in March 1999. By September 2002 thatnumber had more than tripled to twenty-six loan products. Likewise, the number ofproducts marketed to business students increased from eight to sixteen; dental studentproducts grew from three to nine; and loan products specifically for medical23One reason that private loans are an important funding source for independent students and graduate and professional students isbecause they do not have access to PLUS loans.20