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Private Loan Borrowing Rises; Some Forgo Federal Programs

September 4, 2007

The proportion of undergraduates borrowing private loans has grown from less than 1 percent in 1995-96 to 5 percent in 2003-04, according to a new issue brief by the American Council on Education (ACE). Furthermore, one out of five undergraduate private loan borrowers was eligible for federal student loans yet failed to take advantage of the lower interest rates and more flexible payment options they offer. Half of the borrowers who took out private loans exclusively did not even file a Free Application for Federal Student Aid (FASFA) form.

Additional findings include:

  • Private loan programs accounted for 20 percent of all education borrowing in 2005-06, making them the fastest growing component of student financial aid.
  • Private loan borrowers tend to be full-time, dependent students from middle- and upper-income families. Seventy-seven percent of private loan borrows also take out a Stafford loan, which is the primary type of federal student loan.
  • Almost 90 percent of private loan borrowers apply for other types of aid, and 64 percent receive grant assistance.

Although the issue brief admits to difficulties in determining the explanation for some students relying heavily on private loans, there are several possible reasons: the application process for private loans is easier than completing the FAFSA; students may have been unclear about the differences in the cost of private loans that provide low introductory rates and inflexible repayment plans compared to federal loans; or the student is ineligible for federal loans, as a result of either attending on a less than half-time basis, not being a U.S. citizen or permanent resident, or not having not filed a FAFSA.

In response to this issue, the U.S. Senate passed a bill last month that would require private lenders to provide more-detailed information to prospective borrowers about the loans they offer, and to notify them of their eligibility for lower-cost federally guaranteed loans.

To view the full issue brief, visit the ACE Web site. Additional resources related to financial aid can be found on the research pages on the NACUBO Web site.