Students leaving money on table in not using government loans: Report

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More than half of all students who took out private education loan were eligible to borrow more from the federal government than they ultimately did, and 30 percent of them did not use government-backed loans at all.

That’s according to a new report from The Institute for College Access & Success (TICAS), a nonprofit organization that says many student borrowers are leaving money on the table when they turn to private-sector lenders such as credit unions.

The report’s authors recently found interest rates as high as 14.24 percent on private undergraduate loans, compared to 5.05 percent on federal loans. They are calling on colleges and universities to do a better job of educating students about their eligibility for government-backed loans.

“Private education loans are one of the riskiest ways to pay for college,” the report argues. “Unlike federal loans, they typically have variable interest rates and lack the important borrower protections and repayment options that come with federal loans.”

Many credit unions across the country offer student loans, with SNL reporting more than $4.4 billion student loans outstanding as of March 2018 – a 14 percent increase from the previous year.

According to Scott Patterson, president and CEO of Credit Union Student Choice, a credit union service organization that works to help CUs make student loans, credit unions and other private student lenders already currently provide more than enough disclosures to verify borrowers’ needs through schools’ certification processes.

“In fact, the disclosures provided by private lenders are more complete and transparent than those provided by the federal government, which holds more than 90 percent of student loans outstanding today," said Patterson. While the CUSO promotes credit union student lending, Patterson said the company has always encouraged borrowers utilize the Free Application for Federal Student Aid (FAFSA) and to exhaust all “free and cheap” federal student aid before turning to CUs and other private lenders.

Preview of what's to come?

The report from TICAS, an advocacy group that focuses on college affordability and availability, offers a preview of how the policy debate with respect to student loans is likely to change if Democrats take control of Congress in November.

The education finance industry has argued in recent years that the federal government, which does not consider borrowers’ ability to repay their loans, bears far more responsibility than banks do for the massive run-up in U.S. student debt.

Student debt outstanding rose from less than $800 billion in 2010 to $1.4 trillion this year. Federal loans represent more than 90 percent of that debt, according to industry data.

Following President Trump’s election in 2016, industry officials hoped that congressional Republicans would scale back the federal program in ways that would benefit the private sector — such as by restricting government-backed loans to parents and graduate students. Shares in SLM Corp., the student loan giant known as Sallie Mae, climbed 59 percent between Nov. 8 and Dec. 7, 2016.

But over the last 20 months, the GOP-led Congress has failed to enact major changes to the nation’s student loan programs.

If Democrats gain control of the House in November, they may well point to the report released Wednesday as evidence for the need to steer more borrowers into government-backed loans.

The report’s authors support legislation — introduced over the summer by Democratic Sens. Richard Durbin of Illinois, Tina Smith of Minnesota and Jack Reed of Rhode Island — that would require schools to counsel students about any unused federal student aid eligibility before they shoulder private debt.

That bill has drawn opposition from the Consumer Bankers Association, which represents the nation’s largest private student lenders, including Sallie Mae, Wells Fargo and Discover Financial Services.

“Provisions in this legislation are needed, but not for private student loans,” the trade group’s president, Richard Hunt, said in a July 16 press release. “Private loans have comprehensive, plain-language disclosures so students and their families know the full cost of their private student loan upfront. The same disclosures simply do not exist for federal loans and should.”

Many financial institutions also argue that the structure of the federal loan program — borrowers are not underwritten based on their ability to repay — contributes to fast-rising tuition bills at colleges and universities. They say that students can get federal loans even if their job prospects are likely to be poor, driving up the demand for higher education. They also maintain that student default rates have been rising as a result of the federal government’s dominant role in the market.

Ryan Donovan, chief advocacy officer at the Credit Union National Association, said while CUNA is all for transparency and consumer protection, the bill “falls short of being helpful to those borrowers by adding questionable requirements to private student loans while remaining silent on potential improvements to the federal student loan program – which represents 92 percent of outstanding loans.”

The poor pay more?

But in its new report, TICAS flips that criticism on its head. The nonprofit organization argues that as a result of the underwriting done by private student lenders, students from poorer families pay more than those from wealthier households.

“Regardless of whether they are fixed or variable, interest rates for these loans are typically highest for those who can least afford them,” the report states.

The report’s conclusion that 53 percent of private student loan borrowers in the 2015-2016 school year did not use the maximum amount available from federal loans was based on an analysis of data from the National Postsecondary Student Aid Study.

In the previous edition of that study, from the 2011-2012 academic year, 47 percent of private student loan borrowers did not use the full amount available from federal loans, according to Debbie Cochrane, vice president at TICAS.

Cochrane said that there are likely multiple reasons why many college students do not fully avail themselves of federal student aid.

In some cases, the student may not complete a financial aid application. In other situations, the student may receive some federal money, but later determine that the proceeds do not cover the full cost of attendance, and turn to private loans without realizing that additional federal funds could be tapped.

“When the student needs more, they just think private loans are their only option,” Cochrane said.

The report also places blame on financial aid offices at some colleges, noting that their practices vary widely. Prior to approving a loan, private lenders typically get certification from the school, verifying that the borrower is enrolled and collecting other information.

“Some colleges take care to inform students about their federal loan eligibility before certifying private loans, whereas others encourage private loan financing by including private loans in students’ award packages,” the report states.

Melissa Angell contributed to this report.

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Student loans Student loan debt Consumer lending Law and regulation Financial aid Student loan ABS CUSOs Consumer Bankers Association CUNA