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

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Private Loans and Choice in Financing Higher Educationmay also be at the federal Stafford loan limits and might benefit from increases inthose limits. 48 At the same time, the question remains whether increasing the loanlimits for all students would be the best use of scarce federal resources. Targetingincreased federal loan limits to the students or institutions who require morefunding but cannot easily obtain it might be another option for policymakers toconsider. Another option would be to increase loan limits for all students, but giveinstitutions the flexibility to restrict loan availability in certain cases.◗◗◗Federal government: interest rates. As noted earlier in the report, interest rates onprivate loans traditionally have been higher than federal student loan interestrates. Nevertheless, in recent years the large gap in interest rates between the twotypes of loans has diminished, and many private loan products offer terms andconditions that are competitive with federal student loans. It remains to be seenwhether the decision to remove variable rates on federal student loans in July 2006and replace them with a fixed rate of 6.8 percent will have any effect on privateloan borrowing. Although the federal student loan fixed interest rate will providestudent borrowers with more predictable monthly payments, it is less clearwhether the fixed interest rate will add to or detract from private loan borrowing.Postsecondary institutions. One of the greatest challenges for institutions isfinding ways to reconcile their responsibility to counsel students on educationdebt management while at the same time ensuring that classroom seats anddormitory beds are occupied. Colleges and universities have several options foraddressing private loan concerns on their campus. Although some financial aidadministrators do not believe loan counseling has any effect on student borrowingdecisions, others noted that efforts to target high risk borrowers and provide themwith additional financial counseling have found measured success with reducingthese students’ loan default rates. Financial aid offices might consider providingvarious forms of private loan counseling based on a student’s borrowing level.Students considered to be low-level borrowers might be provided written materials,whereas students with medium levels of debt may be asked to meet individuallywith a financial aid officer, and students who are high borrowers might be requiredto attend several debt management sessions throughout the academic year.Colleges and universities with a preferred lender list may consider asking theirlenders to assist with the counseling process or could stipulate that lenders notapprove students for private loans without first conferring with the school’s financialaid office. Despite the challenges postsecondary institutions face with regardto student use of private loans, implementing procedures on campus can makeprivate loans manageable for both the school and student borrowers.Consumers: students and parents. The general public, and postsecondary consumersin particular, also have a responsibility when it comes to understanding financialaid and private loans. Despite the publications explaining financial aid that thefederal government, postsecondary institutions, and numerous private organizationshave made available, many students entering college and their parents continue tobe uninformed about the financial aid process. Students applying for financial aid48For some students, private loans may not be an option if they do not meet lenders’ criteria.74
Private Loans and Choice in Financing Higher Educationand their parents should know that they will be responsible for paying at least aportion of their college costs, and they should familiarize themselves with the typesof financial aid available along with the terms and conditions associated with theseaid sources. Students do not necessarily have to know the current interest rates forstudent loans; however, they should know that multiple sources of aid, includingprivate loans, are available for financing postsecondary education.◗Lenders and guarantors. The providers of private loans play an important role inhigher education financing and have proven that they can facilitate the coexistenceof both FFEL programs and their private loan products. Because anincrease in federal loan limits would not have a substantial impact on manyprivate lenders (most will simply shift some of their portfolio volume fromprivate loans to federal loans), lenders should continue to responsibly servicemarket demand. This may include a practice of advocating students to borrowthe maximum guaranteed federal student loans for which they are eligible, whileat the same time offering private loans with favorable terms and conditions tomeet any remaining financial need. In addition, private loan providers shouldremain cognizant of the increased debt burden many students are taking on andexplore the possibility of working with institutions to counsel students on borrowingresponsibly, especially those students who are taking on large debt burdensafter accounting for both federal and private loans.Ultimately, although these policy implications exist, private loans represent only asmall portion of the total financial aid available to students. No one-size-fits-all solutionexists that will either make private loans disappear or eliminate increasingamounts of student debt. Even if federal loan limits are raised in the next HEA reauthorization,private loans will continue to play an important role in financingpostsecondary education, facilitating choice and providing financial means to studentswhen they have exhausted other options.75
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Table of ContentsExecutive Summary
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Page 91 and 92: ReferencesA Report of the ABA Stude
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