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

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Private Loans and Choice in Financing Higher EducationI N S T I T U T I O N A L P R O F I L EPrivate loans at community collegesCommunity colleges throughout the United States have not had to deal with theincreases in private loan volume experienced by many four-year postsecondary institutions.This largely is because community colleges have remained an affordable highereducation option, where most students’ financial need is met through federal, state,and institutional aid sources.Students taking out private loans at community colleges generally represent less than 1percent of total student enrollment at the institution. Additionally, students whoreceive private loans borrow, on average, smaller amounts than their private loanborrowing counterparts at four-year postsecondary institutions. For instance, at onetwo-year public institution in Michigan, only five students obtained private loansduring the 2001-02 academic year; they borrowed a total of $18,372, or an average of$3,674. The financial aid office at the college noted that the few students who borrowedprivate loans did so because of their ineligibility for federal student loans. At thesame time, the school reports that the number of students receiving private loans hasremained about the same during the past several years.Another community college in Michigan certified eleven private loans for its 9,900student enrollment during the 2001-02 academic year, signifying about a 50-100percent increase in private loan borrowing over the past five years. Unlike the communitycollege mentioned above, the eleven students at this institution borrowed largeramounts on average, with the average private loan being $4,813. The financial aidoffice at this community college suggested that the larger loan amounts might beattributed to student borrowers wanting to support their current “lifestyles.”As long as community colleges remain affordable, private loans are not likely tobecome prevalent sources of aid at community colleges. Nevertheless, if communitycollege tuition and fees begin to increase at rates similar to four-year institutions and iffederal loan limits are not increased, public two-year institutions may have to beginpaying additional attention to the private loan market.When packaging financial aid, administrators prefer to package with grants; however,given the high demand for these limited resources, aid administrators havecome to rely heavily on student loans. Aid administrators prefer to package federalloans, but for many, need still is not fully met after packaging the maximum Staffordloan amounts they are eligible to receive. Some financial aid administrators includea PLUS loan in the package at this point, but others consider discussing private loanoptions with students.Attitudes toward the use of private loans to help finance postsecondary educationhave changed during the past several years. A financial aid administrator at a largepublic state university in the mid-Atlantic region commented, “It was only a few years26
Private Loans and Choice in Financing Higher Educationago that we didn’t want to mention private loans to students as a stop gap; it kind ofwas like a four-letter word. Now, we feel this is the only choice.”Financial aid administrators are not the only ones expressing less reluctance towardprivate loans and borrowing in general. Financial aid professionals who have workedin the field for several years have noticed recent changes in students’ attitudes towardborrowing. Twenty years ago it was not uncommon for financial aid packages toinclude 50 percent grant aid and 50 percent self-help (EFC, personal savings, andloans), yet students tended to be leery about borrowing to finance their education.Current financial aid packages are more likely to consist of a list of self-help optionsthat sometimes do not even cover the student’s entire cost of education, yet manystudents do not bat an eye. One financial aid administrator commented, “Studentsalmost seem resigned to take out several loans to cover the cost of their educations.”Another aid administrator surmised, “The reality is that we’re living in a culture thathas become desensitized to debt.”More students in recent years have approached financial aid officers and requestedeither different or additional options to finance their postsecondary educations. Afinancial aid administrator at a large public university in the Midwest commented,“Sometimes I think the students view our office as an ATM—they come in with newapplications every couple of weeks to get more money.” In some cases the financial aidoffice had packaged a PLUS loan for which the student’s parents either were deniedor simply declined. In other cases students may have been ineligible for federal financialaid for a variety of reasons, including not making satisfactory progress, taking toolong to complete their educations, or reaching their federal loan limits. Approximately50 percent of students accounted for their unmet need by working, but theother half turned to private loans to fill the gap (College Board and NASFAA 2002).Institutional responsesInstitutions have elected to address the use of private loans in a variety of ways. Someinstitutions have established procedures to discourage student use of private loans. Apublic two-year institution in California does not want its students turning to privateloans as a way to “skirt the process” of federal financial aid. At this school any studentwho wants a private loan must go through a formal petitioning process, and even thenstudents are encouraged to fill out the FAFSA because most of the school’s studentsare eligible for some type of federal aid.While it is not surprising that many community colleges process a minimal numberof private loans, it is much more difficult for four-year institutions to do thesame. Four-year private institutions face high tuitions and four-year public collegesstruggle to balance increasing tuitions and decreasing state subsidies. Many ofthese four-year institutions are deliberately attempting to minimize the number ofprivate loan borrowers. For example, a small state university in the Southwestprefers not to tell students about private loan options in an attempt to encouragethe use of PLUS loans and limit the amount of student borrowing. Likewise, a27
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ReferencesA Report of the ABA Stude
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