More Students Turn To Private Student Loans

By Olga Norstrom

(U-WIRE) NEW YORK - An increasing number of college students are turning to private loans to finance their education -- despite the risk of sinking deeper into debt -- as the gap between the cost of a college education and federal aid continues to widen.

The average cost of a four-year private college education has jumped by 43 percent since 1992, while federal loan limits have not increased in over a decade, said Sandy Baum, an economics professor at Skidmore College. Baum is co-author of the "Trends in Student Aid Report," which is published annually and sponsored by the College Board.

Meanwhile, there has been a private education loan increase of 45 percent among undergraduates and 51 percent among graduates since the 2001-02 academic year.

"Last year students borrowed $6.9 billion from private lenders," Baum said. "This represents a 477 percent increase from the 1995 academic year."

The total volume of private student loans has now surpassed the amounts awarded annually under the government-financed federal student educational grants, Federal Work Study and the Federal Perkins Loans programs combined, she said.

But while private lending has increased, it still only comprises 10 percent of the total student loan volume, said Kenneth Redd, director of research policy and analysis for the National Association of Student Aid Administrators.

"Only a minority of all undergraduates -- about 4 percent -- receive private loans, but these are generally students attending higher-cost schools like New York University, or who have very high financial need," Redd said.

The majority of students receiving private education loans are graduate and professional students in the law and medical fields.

The drawback of private student loans is that monthly payments begin accumulating interest right after disbursement, so interest accumulates while students are still attending school.

"While it is a small percentage of students that borrow from private lenders like Sallie Mae, those who do turn to private loans are borrowing quite heavily," said Marie O'Malley, vice president of marketing at Nellie Mae Corp. and co-author of the 2002 National Student Loan Survey , in a statement. She reported that about one-quarter of private loan borrowers perceive themselves as having significant problems with their education debt after graduation.

Excessive debt can affect students' decisions about their careers, students said.

Jude Divers, an undergraduate in the School of Continuing and Professional Studies, borrowed $6,000 in private education loans this year. She would like to go to medical school after graduating from NYU but considers this pricey dream "iffy" because she does not want to add to her debt.

Private education loans from lenders like Citibank and Sallie Mae, unlike federal loans, allow students to borrow for non-tuition costs like room and board.

Students at NYU can borrow from one of the two lenders at negative 1 percent interest rates without fees, said Antonio Del Bono, NYU's director of financial aid. "These rates are among the lowest in the country," Del Bono said.

But the lowered rates have not eased some students' fears about life after graduation.

"My first job out of school, I'll be making a lower-end salary," said Cindy Luff, an NYU graduate student in occupational therapy who has incurred more than $100,000 in debt. "Now that these programs are starting to list these loans on our credit reports, how am I going to be able to get a car or rent an apartment?"

Some students said they were uncertain whether higher salaries could eventually cover the extra burden of education debt.

"The NYU name better get me the kind of job I'll need to be able to pay my money back," Divers said. "I'm paying so much for the name, and so far I'm very disappointed that I am not getting my money's worth."

A few students said counseling required for federal student loans should be mandated for students obtaining private loans.

"What is missing is that they don't sit with the student and strategize," Luff said. "We don't get good counseling at the Office of Financial Aid. They don't provide students with any direction."

It is likely that if federal education loan limits were increased, a significant proportion of the students who are currently receiving private student loans would obtain more federal loans instead, Baum said.

Congress is considering raising federal loan limits under the Higher Education Act , which is up for reauthorization this year. The bill, which called for colleges to lower their tuition rates in October, proposes increases in all forms of federal financial aid, including grants, loans and work-study.

Other students, like Jessica Ebert, who has borrowed over $20,000 in private loans to pay for a graduate degree in science and environmental reporting at NYU, consider the cost a good investment.

"It concerns me that I'm here for less than two years, and my debt will be more than my entire undergraduate education," Ebert said. "But I'm here to learn a craft, and that craft makes me happy. So even if I have to pay off loans for the next 20 years, it's worth it."