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Report: Low-income Students Misinformed About Costs and Benefits of Private Loans

WASHINGTON, D.C.

As incoming college students continue to borrow from private lenders to combat rising tuition costs, low-income undergraduate students are among the least informed about the financial aid process, according to a new report released today (Friday) by the Institute for Higher Education Policy.

In “The Future of Private Loans: Who Is Borrowing, and Why?” the authors say it is crucial for these students to learn about the pros and cons of private loan borrowing before continuing their postsecondary education.

“Independent students tend to be low-income students,” says lead author Courtney McSwain. “There is a lot of concern that they don’t have access to information at various levels.”

Students are turning to the booming private loan industry because of rising tuition costs, limited federal loans and insufficient grant awards. The report says federal and private loans differ in structure, default risks, interest rates and fees, among other things.

Currently, the report says, 83 percent of private loan borrowers are undergraduate students, 9 percent are graduate students, 7 percent are professional students and 1 percent are postbaccalaureate students not in a degree program. Students seeking professional degrees tend to borrow the most money, nearly $11,000 a year, according to the report. By comparison, graduate students borrow more than $8,000 a year and undergraduates borrow about $6,000.

McSwain also says it’s important to note that, across the degree fields, many private loan borrowers attend private institutions.

“The [tuition] prices they’re facing are very high,” she says. “They are still looking to fill the remaining need.”

According to fafsa.com, the maximum amount that a student may borrow under the federal Stafford loan is based on his or her grade level. First-year students may borrow a maximum of $2,625. Second-year students may borrow an additional $3,500 while juniors and seniors may borrow $5,500 each year. Graduate and professional students may borrow $8,500 per year.

However, the report says not all borrowers take out the maximum amount of Stafford aid available to them or receive a Stafford loan at all. According to data collected by the U.S. Department of Education in 2003-2004, 82 percent of dependent private borrowers and 53 percent of independent private borrowers received the maximum Stafford amount.

“Students may have already exhausted cumulative limits on federal loans and find they need to borrow to continue their education,” says McSwain. “But the private loan industry’s benefits versus the costs can vary and it definitely has an impact on overall debt.”

The report says it is difficult to predict the future of private loans, but students will continue to supplement financial aid with private loans as long as there is a continuing gap between financial aid packages and tuition costs.

By Shilpa Banerji



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