New Study Explores the Various Types of Students Who Borrow Private Loans to Fund Their College Education
Published May 15, 2014
Washington, D.C., Dec. 15, 2006—Private loans are becoming an essential part of financing postsecondary education in today’s market of rising tuition costs and fees, according to a new report issued by the Institute for Higher Education Policy titled, “The Future of Private Loans: Who Is Borrowing, and Why?.” Data from the highly anticipated publication shows that nearly a quarter of all professional students took out a private loan, compared with five percent each of all undergraduates and graduates. More than three-quarters of private loan borrowers also receive federal aid available through the Stafford loan program. Private loan borrowers tend to be students who: attend private institutions, enroll full time for the full school year, or work less than full time; as well as undergraduates who are dependent (those under 24 years old) and more apt to come from middle-income families; and undergraduates and graduates who are financially independent and likely to have low incomes.
Supported by The Pew Charitable Trusts, the Institute’s national report examines recent developments in the private loan industry, characteristics of private loan borrowers, and trends that might impact the growth of private loans in the future. It draws on recent financial aid data and in-depth information from finance professionals to offer the most comprehensive look at private loans within the student lending industry.
“With some analysts predicting that private loans may surpass federal student loan borrowing by the end of the decade, this study aims to look beyond the recent controversies about private loan marketing to explore critical questions about what the industry may look like in the near future,” said Institute President Jamie P. Merisotis.
“While private loans are comparatively a small portion of all aid for some groups of students, they are becoming increasingly important. Given the fact that experts are predicting private lending will continue to grow, it is important to chart a reasoned debate about private loans and their potential benefits and risks for students in the future.”
Other key findings:
- Of all student loans awarded, $16 billion (19%) was in the form of private loans, compared to less than five percent just 10 years ago. Of all private loan borrowers, 83 percent are undergraduate students, 9 percent are professional students (e.g., medical or law), and seven percent are graduate students. Yet, professional students borrow an average of $11,000 per year in private loans, compared to about $6,000 per year for undergraduates and $8,000 per year for graduate students.
- The vast growth in private loans is being facilitated by several factors, including rising prices of attendance and remaining need faced by students, combined with stagnant federal loan limits; and developments within the private loan industry, such as increased private loan profitability, and increased sales of private loans on capital markets.
- Private and federal loans are distinct from one another in a number of important ways, including funding and guarantee structure; associated risk of default; terms of interest rates, repayment, and fees; and variability in products offered and the borrowing process. These distinctions can translate into significant differences between the pricing and eligibility for both private and federal loans. Whereas, the interest rates on federal loans are fixed and set by law, private student loans mostly carry a variable interest rate based on current market rates and a borrower’s credit rating.
- Private loan borrowers mostly take out federal Stafford loans at the maximum level. Ninety percent of professional and nearly three-quarters of graduate private loan borrowers receive a Stafford loan, and the majority of those who receive a Stafford loan borrow at the maximum. Yet some private loan borrowers do not take out the maximum Stafford or receive a Stafford at all. The reasons for this are unclear, but may include: initially low-interest rates on private loans, inability to qualify for federal loans, perceptions about the ease of obtaining private loans, or lack of awareness about federal loan options and benefits.
- The future of private loans depends on the behavior of both lenders and students within a broader policy and economic environment. The future growth of private loan volume can be impacted by legislative changes made to federal student loan policies, general economic and interest rate environments, conditions of the student loan securitization market, and development of changing marketing strategies and competition. Students face increasingly complex decisions about postsecondary education funding, and must consider the trade-offs or potential costs of taking out a private loan. Thus, the need for targeted consumer education on the pros and cons of private loan borrowing is critical.
The Institute manages a growing research portfolio, including specialized work on the private financing of higher education. In September 2006, the organization announced the establishment of a new Global Center on Private Financing of Higher Education to address the growing role of private financing as an option for access in postsecondary education across the world. The exclusive, global-focused center is also designed to serve as a central repository of comprehensive data and trend analysis of private sector funding. Additionally, The Future of Private Loans: Who Is Borrowing, and Why? joins a series of other Institute publications to offer a unique view on private loans, scholarships and other philanthropic aid, bond issues, and public and private partnerships. Example reports include Private Scholarships Count (2005), the first-ever systematic review of private scholarship assistance to help students pay for college; and Private Loans and Choice in Higher Education (2003), an award-winning publication and the first-ever major U.S. study on private loans.
To download a free copy of the Institute’s new report on private student loans, The Future of Private Loans: Who Is Borrowing, and Why?, visit its Web site at www.ihep.org. To receive free printed copies of any Institute publication, send a request via e-mail to publications@ihep.org.
Editor’s note: Reporters may receive a printed copy of the report, The Future of Private Loans: Who Is Borrowing, and Why?, by sending a request via e-mail to communications@ihep.org.
