Luxury-priced Loans
I know teenagers today like to buy luxury jeans at prices that would make their parents blush. But what about luxury-priced loans?
New analysis by the American Council on Education shows that one out of five undergraduate students who borrowed private loans for the 2005-2006 school year did not take advantage of federal student loans at all. Since private loans are generally more expensive than federal loans, this means students are going straight past the best deals in favor of the priciest options out there.
What's the big difference between federal and private education loans? First off, cost. Federal student loans are fixed at low interest rates and have tightly regulated fees. A portion of these loans may also be subsidized, meaning they don't accrue interest while borrowers are in school.
Second, a borrower focus: Federal student loans guarantee flexible payment options that help students avoid delinquency and default.
In an ideal world, student borrowers should turn to private education loans if they need additional funds after they've exceeded their federal student loan allotment, or if they're ineligible for federal loans. That way, borrowers would get most of their loans at the best rates and with the most flexible payment options. Yet the ACE research shows that about 20% of borrowers are skipping the federal loan process altogether, making the more expensive private loans the bulk of their aid, not the added cushioning.
Why are these private loans attracting students more effectively than federal ones? Students encounter lots of friendly and appealing marketing on private loans, for one thing. But they also may be turned off by the bulky Free Application for Federal Student Aid, the application for all federal loans and many types of "free money," or grants.
According to the ACE data, half of the students who borrowed private loans only, without borrowing federal loans, failed to file a FAFSA. The FAFSA certainly may be daunting to students — it's eight pages long, with more than 100 questions, and asks students for their parents' tax information, which they may not have at hand. In contrast, private loan applications may seem more approachable.
So what can we in the education loan industry do to ensure students get the best deal on their education loans? More than ever, financial aid professionals can make an impact by counseling students about the differences between private loans and federal loans and grants. They can offer support to students facing the intimidating FAFSA. Lastly, financial aid professionals can and must encourage students to be smart shoppers who examine the terms of private loans to find the best bargains.
After all, smart shopping is a key ingredient to student borrowers' long-term financial health. And they should leave the luxury prices to their jean collections.
What do you think can be done to inform students about the benefits of federal loans? In your experience, have you found private loan marketing to be the most persuasive factor in students' decisions? Or does the FAFSA process need to be reformed? We want to hear your thoughts!
Posted by Susan Nathan on November 19, 2007 at 11:38 AM EST
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Blog Author
Susan Nathan
Vice President, Lender and School Services
Biography
Susan Nathan is Vice President of Lender and School Services at American Student Assistance (ASA)®. She has held this position since October of 2002. Ms. Nathan joined ASA in February 1987 as supervisor of the external program review unit. She has held roles of increasing responsibility in product development, operations, client management and customer service, and marketing. She has been a member of the design teams for a number of ASA’s signature products, including FASTFUND, ASA’s disbursement product, and ASA Direct, ASA’s web processing tool. She was the manager of the business plan for ASA’s major system conversion in 1998.
She is credited with the development of ASA’s nationally recognized client management team. Ms. Nathan oversees the ASA Advisory Council, and is the staff liaison to the Marketing Planning Committee of ASA’s Board of Directors.
Prior to joining ASA, Ms. Nathan was a Financial Aid Officer for Lesley College. She is a graduate of Brown University and a fellow of the Institute for Educational Leadership. She is a member of state, regional and national financial aid associations and is routinely sought by the financial aid community as a professional development trainer.
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