Bucking the Tide on Private Loans
As the scandals and debates over private lending have grown in recent months, conventional wisdom has held that private loans are a necessary evil. Sure, students and their families are taking on debt that is typically more expensive and more risky than federally backed loans. But as long as families feel that college costs are otherwise beyond their reach, private loans will continue to become more popular.
By most measures, they have become much more popular. College Board data released last year show that the volume of private loans taken by students has been increasing by 27 percent annually since 2000-1, to a total of $17.3 billion. A decade ago, private loans made up only about 4 percent of student loan volume; now that total is 20 percent.
But while even critics of private loans talk about their growth as inevitable, Barnard College tried to roll them back during the last academic year -- with success that stunned even the college: a 73 percent reduction (more than $1 million) in private loan volume. That suggests many of those taking out the loans do not need to, and might not do so if only someone explained the issues.
And that's what Barnard did this year. The only real change in policy the college made was to require a conversation. Before Barnard would certify to a lender that a student was enrolled, the college required students or their parents to talk to an aid counselor. If, after that conversation, the family wanted to proceed, Barnard did not stand in the way. But for many families, the talk revealed risks and options they didn't know about.
Barnard's policy shift took place a year ago, before the scandals of private lending captured headlines. The idea came from the financial aid office, which, it may be worth noting in light of those scandals, did not maintain a "preferred lender" lists or accept cash or gifts from lenders. Alison Rabil, director of financial aid at the private women's college in New York, said she was looking at data on students and became worried when she saw Barnard students starting to follow the national trend of taking out more private loans.
"It's not just debt, it's your worst kind of debt," said Rabil. "Once we started looking at the private borrowing, we realized we weren't helping students to discriminate among borrowers or to really think about private borrowing. We weren't discussing it with them."
What Rabil describes is in fact the norm in higher education. For many institutions, the only help they have provided is a list of lenders.
Based on the view that providing a list of lenders isn't enough, and may lead many families in the wrong direction, Rabil prepared her team to talk to students and parents. They discussed various scenarios, the kind of advice they would provide and what to do with irate parents (in the end, only one parent was angered by the required call).
When the policy started, Barnard just sent off e-mail messages whenever a request to certify a private loan came in, and the discussions were scheduled almost immediately. "Parents called in a panic and said 'What do you mean you won't process my loan?', and we just say that we wanted to talk about other options and the consequences of taking out this particular loan," Rabil said. "It was not confrontational at all. It was, 'We're calling because we are worried about the financial health of your family.'"
The discussions were mostly on the phone, mostly with parents, and most lasted 20 to 30 minutes, although there were also many follow-up calls. In those calls, Rabil and her staff found out what parents didn't know about private loans and alternatives, which was a lot, even though the typical parent was college educated and a homeowner. Here's what they found:
- Ignorance of the risks to borrowers of private loans. "I would ask them if they knew the interest rate, and most of them didn't know," Rabil said. A lot of parents said that they planned to help their daughters repay the loans, or even to repay the entire loan. "We were horribly blunt," Rabil said, about how students' debts can outlive students' parents. "We had to talk about death and disability. We had to say, 'if you die, your daughter is going to have to pay this loan back, but if you borrow [meaning a parent], that loan goes with you.'" Many parents hadn't given the issue of their mortality any thought. Rabil also said her staff showed parents the cumulative impact of debt on students, and talked with the parents about how the debt might affect their daughters 10 years down the road, when they might be trying to buy a house or contemplating graduate school. "Is this really what you want for your daughter?" was the key question.
- Ignorance about PLUS loans. Private loans are theoretically used when parents and students don't think they can make the "expected family contribution" of an aid package, but Rabil said that many families don't understand the potential of PLUS loans, a federal program for parents to borrow, with capped interest rates unlike private loans. The main thing parents have heard about the program seems to be that repayment starts 60 days after the last disbursement of funds for a year. That discourages them, but they are unaware that it is possible in most cases to get renewable delays of up to a year on repayment, Rabil said. All of the sudden, a loan that seemed like it wasn't an option can become an option, she said.
- Ignorance of the college's payment options. Like many colleges, Barnard allows parents to pay tuition charges on a monthly basis instead of all at once. Parents who wanted to pay in a lump sum and then have their daughters take out private loans didn't seem to understand, Rabil said, that they could put part of their payments on the monthly plan and avoid the need for a private loan. "If we could show them that they could put even $2,000 on the payment plan, that might cut the private loan," Rabil said. In still other cases, she said, the discussions led to the discovery that families hadn't reported relevant information on aid applications and that they were eligible for more aid.
There were some topics that the Barnard officials avoided. They never recommended pulling dollars out of a retirement fund. And on home equity loans, while they encouraged people with home equity to consult with others about the viability of using that as a source of funds, Barnard aid officials felt that they weren't in a position to be knowledgeable enough about housing markets or mortgage terms to make specific recommendations.
The results -- in dollars and reactions -- were impressive. In 2005-6, the last year before the policy, 98 Barnard students took out private loans, for a total of $1,559,385. At the beginning of the 2006-7 academic year, well over 100 students sought certification to take out private loans, but after the required discussions, only 39 students took them out, at a volume of $414,889. The results far exceeded Barnard's goal of reducing loan volume by 20 percent. PLUS loan volume is up moderately, and students and families appear to be using a variety of ways to avoid private loans.
"I was afraid people were going to bite our heads off," Rabil said. "But people really seemed to be appreciative of the attention we were paying to their daughters."
Rabil stressed that the Barnard campaign is not based on the idea that all private loans are bad. There are students for whom other options don't work. But the fact that the relatively brief counseling sessions led to such a large reduction in private loan volume suggests that they aren't necessary for many students who have been taking them out.
The counseling sessions also helped those students who did take out private loans. In those cases, Rabil said that many students and families were on the verge of agreeing to higher interest rates than were available elsewhere, and Barnard tried to steer them to better deals. The experience raised questions, Rabil said, about the way preferred lender lists suggest that some banks are better than others. What Barnard found was that lenders were better or worse for students based on a range of individual factors. For example, in given categories of creditworthiness, the college found the best deals for students borrowing themselves at one lender, while those with co-signers were better off with another lender.
"Even for the families that need private loans, we found that they don't understand what they are getting into, and how we can mitigate some of the consequences," Rabil said. "It's really important that families know what their options are."
Barnard has not previously publicized its approach, so experts on private loans and student aid said that they hadn't heard about it. But when it was described to them, several called the effort a significant one that other institutions should consider adopting.
"This is a very innovative idea, and I like it," said Jamie Merisotis, president for the Institute for Higher Education Policy, which last year issued a report expressing concerns about the growth in private loans. What has happened is that "colleges and universities have been cut out of the conversation" about private loans, with students getting information, not necessarily complete, from lender marketing, he said.
Barnard is in effect forcing itself back into the conversation, Merisotis said. "Students need consultation with the people who can say whether something is a good deal," he said.
The only concern Merisotis had about the Barnard effort was scale. Barnard had four loan counselors handle the calls, and Merisotis worried that institutions with many more students wouldn't have the staff to take such an individual approach. He agreed, however, that larger institutions might apply the idea in group sessions.
Sandy Baum, a Skidmore College economist and senior policy analyst at the College Board, said she thought the effort pointed to questions about whether all private loans are really necessary. "We don't know how much of the volume is discretionary," she said. "Anything we can do to get people to cover their family contributions without more borrowing is important."
Added Baum: "I hope other schools will try this."