The number of students taking out private loans for education is growing rapidly, despite the fact they often are more expensive in the long run.
Borrowing through private loan programs for higher education totaled $17.3 billion in 2005-06, which, adjusted for inflation, is an increase of more than 900 percent since 1995-96, according to a new report on private loans by Jacqueline E. King, director of the American Council on Education Center for Policy Analysis.
Private loan borrowing accounts for 20 percent of all education borrowing, according to the report.
“A lot of times (students and parents) think it might be quicker to do a private loan, even though it’s more expensive,” said Suzanne Pittman, director of financial aid and assistant vice president for enrollment management at Georgia College ‘ State University.
To qualify for a federal loan, students must fill out the Free Application for Federal Student Aid, better known as the FAFSA. The application takes about an hour to fill out, and then the government and college have to process it, which could take weeks, Pittman said.
“Some people think that process is too cumbersome and complicated,” she said. “Sometimes you may have students or families who wait until the last minute to do anything about financial aid, and they think they don’t have enough time.”
Acquiring a private loan is a simpler application process, although sometimes it may require a credit check, she said.
Other possible reasons a student may choose a private loan over a federal loan include comparable introductory rates, a lack of comparative information and misperceptions about who is eligible for a federal loan, according to the American Council on Education report. Several students who filled out the FAFSA for federal loans, though, said they didn’t find the process difficult.
“It was pretty quick,” said Max Kingsley, a sophomore at Mercer University in Macon, Ga.
Jannae Carrick, a Mercer senior, said she did research before applying for a loan and decided a federal loan was right for her.
“I didn’t even really consider the private ones because they have a bad reputation because their interest rates are so high,” she said.
Financial aid counselors generally tell students to apply for federal loans before private loans for that very reason.
“There are some [private loans] that could have very attractive rates, but we’ve seen alternative or private loans that are charging 21 percent interest, so it’s really all over the board,” Pittman said.
The interest rate on a Stafford loan, the most common federal loan, is 6.8 percent.
Generally, private loans should be used to supplement federal loans when more money is needed past the federal loan limit. More than three-quarters of private student loan borrowers also took out a Stafford loan, according to the American Council on Education report.
“We just encourage (students) to go ahead and apply for federal aid, even if they think their family’s income is too high,” Pittman said.
