College students are taking out private or "alternative" loans at a clip that alarms many policy makers. The main reason why is clear and widely acknowledged: College tuitions are rising at a rate that has outpaced the availability of federal grant and government-subsidized loan funds, and students are turning to the higher-cost private loans, in many cases, to fill the gap.
But as the wide-ranging inquiry into the student loan industry has unfolded in recent months, policy makers have also begun exploring another possible factor in the explosion of private loans: how colleges market the loans to their students. Lawmakers, researchers and commentators have expressed concern that college financial aid offices, in letters laying out students' aid awards, "sometimes fail to distinguish between need-based loans and non-need-based loans," as Mark Kantrowitz, publisher of FinAid.org, wrote in an essay for Inside Higher Ed last month.
In other words, the colleges, through this sort of "pre-packaging," appear to be telling students that the non-federal loans are part of their financial aid packages, as if they are part of the institutions' offerings instead of something the students will need to line up (at potentially significant cost) from a private provider.
"Incorporating these loans into the financial aid package without clearly distinguishing them can mask gapping, where the college fails to meet the student’s full demonstrated financial need, and be misleading," Kantrowitz wrote. "For example, when a private student loan is branded as a college loan, a practice that has been criticized by Congress, it suggests that it is a low-cost loan, when in reality it is one of the more expensive forms of education financing."
The underlying suggestion that college financial aid officials (as a group) excessively encourage students to take out expensive private loans when they have other, better options has, like many of the practices they've being criticized for in the unfolding student loan controversy, made them bristle. On Sunday, the National Association of Student Financial Aid Administrators released a survey -- which was also the basis of a standing-room-only discussion Sunday afternoon at the group's annual meeting -- that offers some insights into just how widespread the marketing practices that Kantrowitz and others criticize are.
The survey, by the association’s research committee, finds that 101 of the 1,273 respondents, or nearly 8 percent, reported that their institutions “pre-package” private loans when crafting their students’ financial aid award letters. But a significantly higher number of respondents, 59 percent, said that they make information about alternative loans available to prospective borrowers, and 51.5 percent said they “market (promulgate information on behalf of) specific lenders” to their students.
Apart from their marketing tactics, do colleges do enough to inform prospective borrowers about the pros and cons of alternative loans, and the financial risk such loans could put them at? The survey also sheds light on that set of questions.
Nearly 6 in 10 respondents said that they help students with financial planning and debt management counseling. But just 35.5 percent of them said that guidance specifically mentions alternative loans, and just a quarter of college aid officials said that students at their institutions “receive in-depth loan counseling about alternative loans prior to borrowing.”
Based on those findings, the report of the NASFAA survey says, “it can be reasonably inferred that many alternative loan borrowers may not fully understand to what they are committing.”
Is that a problem? The NASFAA committee’s report offers a divided assessment: “[M]embers of the Research Committee questioned whether student aid administrators should be expected to offer detailed personal financial planning advice… Most felt that aid administrators should stay within their area of expertise, focusing solely on options and choices for financing one’s education. However, the committee members recognized that … financial literacy may become part of the everyday work of the student aid administrator through Congressional action or assignment of that responsibility on campus.”
At the panel session based on the survey, financial aid officers expressed a great deal of ambivalence about their role in informing students about private or alternative loans. Far fewer of them acknowledged marketing the loans aggressively (only one or two hands went up when asked if they pre-package loans, far below the 8 percent of respondents who answered that way in the survey), and most said they found it very difficult to intelligently advise students about private loans when they don't know very much about the students' financial situations.
"I usually don't know a student's credit score, and that does make advising difficult," said one financial aid officer who participated in the discussion at Sunday's session.
Given that alternative loans are "a transaction between a borrower and a lender" and that there are so many lenders competing for this business, said another aid officer, "there's not really a significant way for a financial aid officer [to help students figure out what a loan might cost them] for any but a small number of products. Yet students very heavily rely on the advice of our offices to choose a product."
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