Personal Finance: Borrowers Go Private

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College students increasingly rely on corporate lenders
College students increasingly rely on corporate lenders

RISMEDIA, December 14, 2006?(MCT)?Last year, before the start of the fall semester at Southern Adventist University, junior Debbie Peter realized that with tuition, books and food, her federal student loan wouldn’t get her through the school year.

Peter decided to take out $8,000 in an additional private loan through lender NextStudent?despite her concerns about nonfederal loans’ higher interest rates.

“The other loan company that I looked at had the same (rates),” the graphic design major said. “I just figured I have to do this, so it’s just something I’m going to have to deal with.”

A growing number of undergraduate students are turning to private lenders to help finance their education, according to the College Board, a nonprofit association that provides higher education information to students.

Nonfederal student loans have grown 913% from $1.7 billion in 1995 to $17.3 billion in 2005, when adjusted for inflation, according to the College Board study “Trends in Student Aid 2006.”

These credit-based loans are not equipped with the same protections as federal student loans, said Deanne Loonin, staff attorney with the National Consumer Law Center.

“The idea of people taking loans for higher education in the first place wasn’t meant to be something where people were going to… be completely at the mercy of the private marketplace,” Loonin said. “It was meant to be a social policy with regulations.”

In contrast to federal student loans, which have a fixed interest rate currently at 6.8%, private loans have adjustable rates that can disadvantage low-income students, said Luke Swarthout, higher education advocate for the U.S. Public Interest Research Group.

“Private loans can have interest rates anywhere between 8 percent and 16 percent, and the rates can be lower the better credit you have or the more income you have,” he said. “The open market works sort of counter to our federal student loan program where our goal would be to help and protect the students who need help the most.”

Also, private loans are not eligible for federal consolidation, which could help to reduce monthly payments and lock in a low interest rate, Swarthout added.

Some attribute the growth in private loans to government aid’s failure to keep pace with the cost of education.

In Tennessee, the maximum federal Pell grant, awarded on the basis of financial need, covered only 43% of the average tuition, fees, room and board at a public four-year college in 2005. Twenty years earlier, it covered 62%, according to U.S. Senate Democratic Policy Committee report released in August.

Financial aid officers suggest that federal Stafford loans (capped at $23,000 over a college career) are simply too limited for many students.

“They are only eligible for $2,625 in federal (Stafford) loans” for their first year of college, said Laura Bass, student loan coordinator at the University of Tennessee at Chattanooga. “They may need to take out a private loan to compensate for that, because obviously that’s not going to pay for their tuition.”

Often, students assume they are not eligible for federal aid and go straight to the private lenders, Swarthout said. Instead, students should use the Free Application for Federal Student Aid to apply for government assistance and then take advantage of all federal aid possible, using alternative lenders only as a last resort, he said.

Loonin of the National Consumer Law Center also advises students to weigh carefully their financial aid office’s recommendations regarding which private lenders to use.

“A lot of schools have arrangements with certain private and government lenders,” she said. “In some cases those really are the best deals; in some cases they’re not. … It’s really important for people to shop around and not just take the word of the school and financial aid office.”

Students also can be misled by marketing efforts of private lenders, Bass said.

“We find out from students and parents that they’re getting e-mails and spam from alternative lenders,” she said. “That’s another way that students think it’s their only option. They just get bombarded with it.”

Students certainly should not rule out nonfederal loans altogether, advocates said. For students who have exhausted the limits on federal aid, private loans can be the best way to pay for their education, Bass said.

“Sometimes it’s the only option?but that’s not necessarily a bad thing, because that’s how the student is actually able to go to school,” she said. “I had a student who said, ‘Nobody likes loans, but there’s no better thing than to invest in yourself and your own education,’ and that’s a good outlook.”

Advocates also point out there are downsides to government loans.

“There are a lot of pretty serious collection tools that government lenders have available that private lenders do not,” Loonin said.

If a student fails to make payments on time, eventually the government can resort to garnishing wages and drawing from Social Security and other federal benefits to alleviate the debt. To prevent this, Loonin said, students need to be aware of options such as deferment, forbearance and flexible repayment schedules to avoid going into default.

“A lot of people could sort of stop the bleeding before it gets really bad,” she said.

Advocacy groups like Project on Student Debt at http://project onstudentdebt.org can provide advice, Loonin said.

Copyright ? 2006, Chattanooga Times/Free Press, Tenn.

Distributed by McClatchy-Tribune Information Services.

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