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 Econtinued from the previous pagefederal loan and an private loan must sit for two different loan entrance counselingsessions. The electronic private loan counseling session requires students to completea budget that shows their total costs and their expected sources of financial support.During the loan counseling sessions, students calculate their expected income aftergraduation, expected monthly loan payments, and other variables so that the studentcan have the best information available before making the decision to borrow a privateloan. As a result, the university’s private loan default rate is just 0.7 percent, comparableto the university’s 1.4 percent default rate for federal student loans.When establishing a preferred lender list, schools take a variety of criteria into consideration.Some of the most cited criteria include: competitive pricing; timely processing,approval, and disbursement of loan funds; a willingness to adapt to the school’sprocedures; ability to provide students electronic or web-access to their accounts;responsible marketing practices; an array of borrower benefits, rewards, and incentives;and knowledgeable customer service representatives. Many institutions also seeknational lenders to ease the process for geographically diverse student borrowers, andsome institutions want lenders who work well with guarantors in the institution’s state(Greentree Gazette, March 2000, p. 18).Some schools have turned to private loan preferred lender lists because of the overwhelmingamount of information on the internet. While aid administrators regard theinternet as a powerful and beneficial tool when comparative shopping for loans, theyalso are concerned about the misrepresentation of certain loan products on the web.By establishing a preferred lender list, colleges and universities are able to provideassurance to their students that the school has an established relationship with thelenders on the list and that the loan products they offer are credible.Several financial aid administrators commented that private lenders often are willingto offer better private loan products to students for the chance to win the school’sfederal loan volume. Additionally, some schools have found that providing a largepercentage of their federal loan volume to a particular lender has potential benefits. Afinancial aid administrator at a four-year private college in California cited an agreementthe school has with a lender: “If we give the okay to the lender that the student isworthy of the loan—likely to persist and graduate—the lender will make the loanavailable to the student, even if the student was initially rejected for the loan.”Private loan counselingWhile many financial aid offices have found ways to streamline the private loan processfor students, the majority of these same offices struggle to provide counseling for thesesame loans. Financial aid offices at institutions participating in federal student aid30
Private Loans and Choice in Financing Higher Educationprograms are well-versed in counseling procedures for federal student loans. Entranceand exit counseling have become the standard; students are told what is expected ofthem as borrowers, and they leave school with a clear sense of what they owe. Manyschools have devised sanctions, such as withholding grades, academic transcripts, andeven degrees, to guarantee students attend their federal loans exit interview.The large number of diverse private loan products, while helpful for meetingnumerous students’ needs, also creates problems when it comes to developingcounseling methods. Unlike federal student loans, financial aid offices do not havea clear sense of either the amount or the type of private loans students hold. Afinancial aid administrator at a four-year private institution in the Midwest commented,“For every private loan we do know about, there’s probably another onethat we don’t. There’s really no way for us to know how much our students areactually borrowing.”Moreover, even when colleges and universities attempt to be proactive by providingliterature to students and parents about financial responsibility and debt management, thematerials often go unread, or the information is coming too late. An aid administrator at alarge public university in the Midwest explained: “Undergraduate debt? Heck, thesestudents are leaving high school with debt! Students are modeling their parents’ behavior,and parents are borrowing like crazy and going into debt.” Another aid administrator atthe same school remarked: “Many undergraduates are surprised to see how much theyactually owe when they have their exit interview before graduation. A lot of them regretborrowing so much when they realize they used the loan funds for pizza money.”Financial planning workshops and sessions at orientation have been helpful to somedegree; nevertheless, financial aid administrators remain concerned about students’overall lack of financial knowledge. An aid administrator at a public university inCalifornia remarked: “Students don’t know the basics—they really don’t know whatfinancial aid is, what loans and grants are. The students don’t understand what thelenders are saying, and this info is constantly changing.” Aid administrators also areconcerned about the many students who pay little or no attention to interest ratesand repayment terms when applying for private loans. Another aid administrator inCalifornia summed it up: “In most cases, what students want is money, and they wantit fast. The students are more concerned about getting the money they need toremain in school at that moment, so they end up applying to the lenders known tohave good acceptance rates and quick turnaround. They’re not thinking about howburdensome it might be to pay the loan(s) back in the future.”Although some financial aid administrators question whether providing counselingfor private loans would in any way curb student borrowing, most do agree that sometype of counseling should be provided. Several aid administrators in California agreedthat private loan counseling is the responsibility of everyone involved—lenders,students, and institutions. The aid administrators believe that schools should requirestudents to attend entrance and exit counseling for private loans with informativematerials provided by lenders.31
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