Students
Missing Out on Cheaper Student Loans
By Shannon
Buggs, Houston Chronicle
A report by
the Institute for Higher Education Policy has found that a fifth
of undergraduate students dependent on their parents take out
private loans instead of federal Stafford loans.
Every higher
education student attending a recognized university at least half-time
who fills out the federal financial aid forms qualifies for a
Stafford loan, which the federal government guarantees.
In bypassing
the financial aid process and going to private lenders, these
students may be raising the cost of their education.
"All
private loans are not bad," said Courtney McSwain, an author
of the study. "But you have to know a lot about them and
yourself before deciding whether they work for you."
In contrast
to federal student loans, which currently have a fixed interest
rate of 6.8 percent, private loans have adjustable rates that
range between the prime rate of 8.25 percent and 11 percent, said
Rob LaBreche of private lender College Loan Corp.
That's less
expensive than other unsecured loans, which are at 13 percent
now, but not as cheap as the federal loans.
"It's
definitely a problem of education," LaBreche said. "A
lot of students are intimidated by the federal process or just
don't know about it."
What may seem
daunting to many is the Free Application for Federal Student Aid.
Completing
the document requires information from the student's and/or his
parents' most recent tax return, as well as answers on an eight-page
pre-application work sheet. And the application has to be completed
every school year for a student to remain eligible for federal
aid.
Usually students
seek private loans before maximizing their federal loans when
they don't want to go through the hassle of completing the federal
forms, said Albert Tezeno, Director of Financial Aid at Texas
Southern University.
Federal loans
in the 2005-06 academic year totaled $69 billion versus just over
$16 billion in private loans, according to the study.
McSwain said
the research showed that students who rely more on private loans
tend to be enrolled at private institutions, which cost more than
their public counterparts, and middle-class students dependent
on their parents for financial support during their college years.
Those characteristics
support anecdotal evidence that upper-income families often "assume
they will not qualify for anything" and never read or fill
out the forms, LaBreche said.
By not becoming
fully informed about the process, these families leave money on
the table because the parents also could qualify for the fixed-interest
rate Parent Loan for Undergraduate Students, which has an 8.5
percent rate.
Instead, they
turn to the banks where they have their checking accounts or mortgages
to get loans to cover what their college savings can't. Lenders
have increased the marketing of their college loan programs.
And most federal
loans are distributed through private banks rather than directly
from the government, which could also contribute to families'
confusion about their lending options.
The newly
elected Democratic leadership in Congress is expected to consider
legislation that would give financial incentives to schools that
steer students toward borrowing from the government.
The study
also found that students who are paying for college on their own
tend to have low incomes and turn to private loans when they reach
the cumulative limit on federal loans, McSwain said. The maximum
an independent student can take out in Stafford loans during an
undergraduate career is $46,000.
Copyright
(c) 2006, Houston Chronicle
Distributed
by McClatchy-Tribune Business News
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