Aid Staff on Alert
The rapid increase in private, or alternative, student loans increases the importance of financial aid administrators, who provide crucial information to families about terms and conditions of various loan options.
A number of factors, including rising tuition and stagnant federal grant and loan limits, have caused more students to turn to private loans to finance their higher education. The private loan industry should be commended for providing the capital that enables countless students to attain their higher education goals, but the rapid increase in private loans does not come without some drawbacks.
One drawback to this increasingly popular form of higher education financing is that the terms on loans vary widely. The credit history of the borrower and/or the borrower's co-signer significantly affects the interest rate on many private loans. Generally this benefits borrowers from higher-income families because they are more likely to have a better credit rating. In addition, the terms on private loans can be affected by the student's chosen major or degree program.
Private loans also offer a variety of borrower benefits, like deferred payment and rewards for on-time repayment. While these can benefit the borrower, families often find it difficult to navigate the oceans of private loan information to determine which loan is best for their individual situation.
This makes the role of an expert independent advisor, like a financial aid administrator, valuable. Aid administrators can help students determine how much they need to borrow, assess whether they qualify for less expensive federal aid options, and evaluate whether the loan terms are reasonable and the student can reasonably expect to be able to make payments at repayment time. This counseling helps students avoid the hardship that comes with excessive borrowing or borrowing loans with unreasonable rates or terms.
"The differences in rates due to credit history make private loans much more complex," noted NASFAA's Great Lakes President and Chief Executive Officer Richard D. George at a recent conference on private loans held by American Enterprise Institute (AEI). "Students need guidance about front-end and back-end benefits. They are borrowing at a time when distilling loan terms is a challenge and they need help. This needs to be an independent assessment of loan terms provided by an expansion of financial aid officers' role or by nonprofits like guaranty agencies."
One example of how a financial aid administrator can help students save money and avoid undue hardship involves a student who took out a private loan with unreasonably high interest rates. The student's financial aid administrator noticed the high interest rate on the loan and advised the student to do this: Take out a loan with better rates to repay the loan with the higher rate. The student took the advice and as a result will save hundreds, possibly thousands, of dollars over the life of the loan.
At the AEI conference, held to explore the fast-growing and under-researched private student loan market, the role of student aid administrators was the center of much debate. A byproduct of the increase in private loans is an increase in direct-to-consumer marketing as more companies market loans right to students and their families. Richard Lee Colvin, the director of the Hechinger Institute on education, noted that lenders are very comfortable verifying enrollment, enabling them to circumvent the traditional school channel.
"As private loans grow very rapidly, the direct-to-consumer marketing also grows," George explained, adding that "private loans don't require school certification, so they can be originated without counseling which many students and families rely on today."
Advocates of direct-to-consumer marketing see the financial aid administrator as a bottleneck, limiting students' loan options to the few companies that the financial aid office has approved. They argue that aid administrators should not interfere with the market because their interference impedes competition. This artificially increases the cost of loans, they contend. Some at the conference argued that the student loan market should be more like the mortgage industry because financial aid administrators' role to protect students can create a bottleneck.
This suggestion was met with strong criticism. "I don't want to see the student loan market go the way of the housing market," said Sandy Baum, a senior policy analyst for the College Board and professor of economics at Skidmore College (N.Y.)
Others agreed, pointing to the record number of foreclosures in the housing industry due to borrowers not understanding all the consequences of borrowing huge mortgages. This group argued that the increase in direct-to-consumer marketing created a greater need for financial aid administrators.
"The role of financial aid officers needs to be enhanced, not eliminated," George said. "Financial aid officers can help a student look at cumulative debt and projected career income and counsel them about appropriate debt levels. We can't do that with direct-to-consumer marketing."
Conference attendees and participants could not come to an agreement about exactly what role financial aid administrators should play in this emerging student loan market, but seemed to agree that the question that needs to be answered is: How can financial aid administrators protect students without restricting (or appearing to restrict) competition between lenders?
This question may ultimately by answered by students and their families, the consumers of these loans.
Ellen Frishberg, director of student financial services at Johns Hopkins University (Md.), suggested that it was the students themselves who motivated her to expand her role to help protect student borrowers. "Students come back and say, 'I had no idea what I was getting into when I took out loans.' That puts us in the role of educating these students," she said.
Conference speakers and attendees also expressed concern that students were not receiving all the information they needed from private student loan advertising.
Conducting a quick online search for private student loans reveals countless examples of this concern. Many websites boast interest rates as low as 7 percent to 8 percent, but they do not suggest how high interest rates could be. They emphasize that no job or credit history is needed, but don't indicate that this will likely increase the cost of the loans. Ads also boast that loans can be deferred for up to five years, but do not hint at how this could increase the overall cost of the loan.
Not all sites are misleading; some sites offer a comparison between federal and private loans and urge students to take full advantage of all available scholarships, grants, and federal loans before considering a supplemental private loan. But many sites do not post this information. In addition, many sites focus on the ease of application for private loans because borrowers do not have to complete the FAFSA and approval can take as little as 15 minutes.
"Private loans can be too easy to obtain on the front end," said Don Betterton, former director of financial aid at Princeton University. "Private loans can circumvent the financial aid office, but students still need accurate information and they may not get that from advertising."
Indeed, many sites emphasize that students can be approved for $40,000 to $70,000 loans in minutes. Colvin expressed concern, saying that he knew there was pressure to get students to borrow as much as possible. Others at the conference shared his concern.
"Some companies are encouraging students to borrow $50,000 a year. It is hard to figure out how much a student should pay for college, but it is easy to say not that much," said Robert Shireman, the executive director of The Institute for College Access and Success.
Shireman also expressed concern that lower-income students generally had a greater risk when borrowing private student loans. In some ways, he argued, this helped determine who went to college.
"Lenders shouldn't determine who goes to college, and that is the direction we are headed," Shireman said.
Despite some harsh criticism of private loans, everyone at the conference seemed to recognize the growing importance of this industry in the future of college financing. While most would like to see enough funding to put every worthy student through college without borrowing, that is not the reality.
Conference participants also agreed that more students would continue to rely on these loans to realize their college goals. The question became how to ensure that students reap the benefits of this large pool of private funds without borrowing too much or borrowing at unreasonably high interest rates.
Financial aid administrators help protect students in both these areas. They negotiate good rates with lenders and help protect students from predatory lenders, noted Betterton. "Financial aid administrators help students get the best loan they can and ensure students don't borrow more than they need."
Haley Chitty is assistant director of communications at NASFAA, www.nasfaa.org.