While the majority of college students borrow manageable amounts and successfully avoid loan default, a growing number of students are accumulating too much of the wrong type of debt.
Borrowers who find themselves in trouble have often turned to riskier (and often more expensive) private student loans before exhausting their federal student loan eligibility. Federal student loans offer protections like fixed interest rates, income-based repayment and loan forgiveness provisions that are lacking in private student loans. In 2008, 64 percent of private loan borrowers didn’t exhaust their federal loan options and 26 percent didn’t borrow any federal loans, according to the Institute for College Access and Success.
Fortunately, this is easily correctable. All lenders should be required to have colleges certify a private loan before disbursing it, so schools will know who is getting these loans and can counsel them.
High-debt borrowers often get into trouble because they don’t fully understand the risks, repayment responsibilities and total cost of their borrowing. A recent National Economic Research Associates survey of 6,500 high-debt student loan borrowers found that 65 percent misunderstood or were surprised by aspects of their student loans or the student loan process.
Unlike the federal loan process where the school certifies a student’s cost of attendance and loan amounts, the private process only requires schools to provide students with the information they need to confirm their enrollment, cost of attendance and the financial aid they have already received. Until there is a streamlined method for schools to track all private borrowers, schools will continue to waste valuable resources finding them. These resources would be better spent advising students on how to best finance their education.
Consumer and student advocates, private loan companies and the higher education community have all asked Congress to pass legislation that would require private loans to be certified by the school before a single dollar can be disbursed. This would provide a crucial opportunity for financial aid offices to identify borrowers who are at risk of taking on unmanageable debt loads or haven’t exhausted other financial aid opportunities.
Justin Draeger is president and chief execuive of the National Association of Student Financial Aid Administrators.