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

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

Low-income undergraduate students are among the least informed about the financial aid process and are more likely to take out private loans to pay for school, according to a new report 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.

Ten years ago, private loans accounted for less than 5 percent of all student loans; now, private lenders control 19 percent of the student loan market. Currently, 83 percent of private loan borrowers are undergraduate students, 9 percent are graduate students, 7 percent are professional students and 1 percent are post baccalaureate 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.

“With some analysts predicting that private loans may surpass federal student loan borrowing by the end of the decade, this study aims to look beyond the recent controversies about private loan marketing to explore critical questions about what the industry may look like in the near future,” says Jamie P. Merisotis, president of IHEP.

“While private loans are comparatively a small portion of all aid for some groups of students, they are becoming increasingly important. Given the fact that experts are predicting private lending will continue to grow, it is important to chart a reasoned debate about private loans and their potential benefits and risks for students in the future,” he says.

Lead author Courtney McSwain says independent students, who also tend to be low-income, are the must vulnerable. “There is a lot of concern that they don’t have access to information at various levels,” she says.

Even though they qualify for the lower-cost federal loan, an increasing number of students are turning to the private loan industry. Out of all independent private loan borrowers, 49 percent are low-income, with a family income of less than $20,000.

Students are also taking out private loans, in part, because of rising tuition costs, limited federal loans and insufficient grant awards. Students at expensive private schools often find themselves up against the borrowing limits for federal loans, necessitating the private loan.
However, the report says not all borrowers take out the maximum amount of federal Stafford aid available to them, and some don’t take out 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.

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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