Private loan use rises in face of soaring tuition costs

Amy Fisk graduated in December and looked forward to the transition to professional life…. Amy Fisk graduated in December and looked forward to the transition to professional life. She graduated from Pitt with a major in architectural studies and a minor in studio arts, and it didn’t take her long to find employment.

What she didn’t know was how much this transition would cost and how much work was ahead.

Today Fisk works three jobs because she is more than $70,000 in debt because of private loans. She works six days a week at Caribou Coffee in Robinson Township, a toy store in Sewickley and her father’s office building to pay off three years worth of private loans from PNC Bank.

And she is only at the beginning.

Fisk’s problems are only a small indicator of a much larger trend. Private loans are becoming increasingly popular among college-age students, in part because they are easier to get and they fill the void left by federal funding and the rising cost of college, according to Conwey Casillas, director of public affairs for Sallie Mae, the nation’s largest private loan provider.

These loans are becoming increasingly necessary as college tuition continues to skyrocket; it is up 35 percent from five years ago after adjusting for inflation, according to the College Board’s “2007 Trends in Student Aid, College Pricing and Student Debt.” Rising tuition has in turn made government aid insufficient for most students, just one reason for the surge in private loans.

However, private loans carry much larger interest rates – as high as 20 percent – when it comes time to pay them back, compared to the five percent rate for federal loans obtained through programs like the Free Application for Federal Student Aid. Some federal aid such as Pell grants are interest-free and require no repayment.

The increase in the number of loans combined with rising interest rates is creating a hazardous trend that is leading to deeper debt for some students.

“Kids should only get a private loan as a last resort,” Mike Reiber of the Pennsylvania Higher Education Assistance Agency, said. “They carry very large, cumbersome rates of 18 percent to 19 percent interest. They are a main contributor in the large amounts of debt that students face today.”

Both undergraduate and graduate students borrowed more from banks and other private lenders than ever before, about $17.3 billion in the 2005-2006 academic year, having grown at an average annual rate of about 27 percent in inflation-adjusted dollars since 2000-01, according to the College Board’s study.

Bob Shireman, executive director and founder of the Project on Student Debt, a nonprofit advocacy group, said that private loans encompassed five percent of all aid in the 1990s. That number is now slightly more than 20 percent, and student debt has increased 50 percent after inflation over the last decade alone. Even though private loans are still not as popular as federal loans, they contribute to a much higher level of debt.

“Federal loans are still the bulk of all loans today, but private loans are rapidly rising along with student debt,” Shireman said. “There’s been a large increase in both the number of students taking out private loans and the amount given to them, which is inevitably leading to more debt. It is a hazardous trend.”

Although private loans create larger amounts of debt, some argue they are necessary to help students when federal loans aren’t sufficient. The number of private loans given to students has increased annually by 25 percent since 2003, while federal loans have increased by only 8 percent, according to Casillas. This trend, he argues, has a lot to do with federal funding falling well short of helping students pay for college.

“Federal loan limits have not increased for many, many, many years while tuition to attend college is growing every year,” Casillas said. “So obviously there is a growing gap between the amount of federal loans and the cost to attend college. Private loans are there as one of the lowest cost options available to students to bridge the gap left behind by the lack of federal funding.”

While Casillas looks at private loans as a quick and easy way to fill that gap, Reiber offers a different perspective on the borrowing process.

“Kids need to research free-money awards because of the obvious reason that it is free and doesn’t carry a repayment process,” he said. “This is the most overlooked part of the process. Unfortunately for them, it is a lot easier to search out a private loan than to research and go after free money.”

While Rick Castellano, debt manager for Sallie Mae, said he would “disagree that debt is a large problem,” and that “most students graduate without incurring large student loan burdens,” the effect of student debt is having a huge impact on students’ post-graduation lives.

A study conducted by investment firm AllianceBernstein last year surveyed 1,500 recent graduates; 44 percent of those surveyed delayed buying a home because of debt, 28 percent put off having children and 32 percent moved in with their parents to save money.

Castellano said that only 30 percent of bachelor’s degree recipients at four-year institutions graduated with less than $10,000 in debt. However, Suzanne McCulloch of Pitt’s Office of Admissions and Financial Aid said that the average indebtedness for Pitt undergraduates, including both full- and part-time students who graduated during the 2005-2006 school year, was approximately $15,300 for Stafford and other federal loans. That statistic doesn’t even account for the debt incurred by private loans.

The upswing in private lending and the debt inherently incurred isn’t going unnoticed, especially in Washington, D.C. Luke Swarthout, a member of the U.S. Public Interest Research Group, is one of many people trying to make college more accessible while simultaneously driving down debt.

“We’re working to pass comprehensive higher education reform that will lower student debt for college students and make college more affordable,” he said. “We’re also working to increase need-based grant aid that helps low- and middle-income students access college without relying on private lenders. The key is more federal support in the face of rising costs for higher education.”

President Bush recently proposed and signed into law the biggest increase in Pell grants in more than 30 years. The amount increased from $260 to $4,310 for the 2007-2008 school year. However, it is a small step in a much larger problem.

It’s too late for people like Fisk. She is aware that she could have researched more free-money aid and government support, but it was a chain of events she had little to do with.

“I didn’t really know much about the whole process,” she said. “My parents handled most of it, but now I have to pay off the debt.”

And with $70,000 of debt, she is only at the start of a long process toward being debt-free.