Private Loans: Who's Borrowing and Why? Private Label Borrowing by Students Outside of the Federal Loan Programs

2003-04-01

Executive Summary

As the purchasing power of federal and state grants continue to decline in relation to increasing tuition and living expenses, students have increasingly relied on loans in order to finance their college education. Almost 65 percent of college students graduated with federal education loan debt in 1999-2000, and the average undergraduate borrower left school nearly $17,000 in debt with federal student loans.

Federally-backed loan programs, including the Stafford and Perkins programs, were instituted to offer students better terms and conditions on loans than those available in the private market, making it easier for students to afford higher education and later on, more manageable for students to repay loans used to finance their education.

In recent years, however, increases in private education loan borrowing, in which students borrow outside of the federal loan programs, have sparked concerns within the higher education community. Private education loans are not subject to the same interest rate or borrowing caps as federal student loans, nor do they offer the same flexibility in payment plans, which can make repaying private loans a substantial burden for some students. According to the College Board, private label education borrowing has increased 39 percent over the past two years.

This jump in private loan borrowing has led some to conclude that current caps on federal education loans are too low to cover the loan funds now needed by students. However, to fully understand the factors driving private label student borrowing, it is necessary to take a closer look at this population of borrowers.

This report analyzes private label borrowing by students, using data from the 1999-2000 Department of Education's National Postsecondary Student Aid Survey (NPSAS), to better understand what factors drive students to borrow private education loans. Family income, students' costs of attendance, and borrowing in the federal programs are some of the factors discussed in this analysis.

According to the Department of Education's data, private label borrowing accounted for only a small percentage of overall student borrowing, and many private label student borrowers took on private loans without demonstrated financial need and without taking full advantage of loans available through the federal programs.

Key findings:

• Small percentages of students borrowed private label loans: 3.6 percent of students overall took on private debt, and among Stafford borrowers, only 10 percent borrowed private label loans.

• Nearly 24 percent of students with private label debt did not borrow any Stafford loans, and 26 percent borrowed less than the available maximum Stafford loan. The average borrower with Stafford loans below the maximum level could have borrowed about 40 percent more in the Stafford loan program, or $6,623 over the course of a four-year undergraduate education.

• Nearly three quarters of private label borrowers who took on private label debt did not have demonstrated financial need, defined by the federal government as additional costs of attendance beyond federal loan, work-study and grant assistance.