Online counseling pushing college students toward risky private loans

More than half of private loan borrowers don’t maximize their federal student aid options.

College and university websites should require prospective students to check their eligibility for federal student aid before private loans with ever-changing interest rates are presented as a legitimate option, according to a report from a nonprofit group advocating for greater college access and affordability.

One-on-one counseling, either in face-to-face meetings or over the phone, is the “most effective” way to find college loans that won’t cost student thousands of dollars in exorbitant interest charges, while web-based counseling makes it “too easy [for students] to acknowledge receiving detailed information without actually reading or comprehending it,” said the report, published by The Institute for College Access & Success (TICAS).

TICAS, a California-based nonprofit organization, is a prominent supporter of the Income Based Repayment (IBR) plan, which allows college students to adjust their federal student aid payments according to their reported income. The plan went into effect in 2009.

Matthew Reed, TICAS’s program director, said campus counselors, prospective students, and parents should ensure that all federal loan and grant options are exhausted before resorting to private college loans that—like a credit card—have variable interest rates that can steadily raise a student’s monthly payments. Federal loans have fixed interest rates.

Some colleges, Reed said, include private loan information on official campus websites and mail sent to incoming students.

“It’s a very problematic practice, and it might keep families from looking for other options,” he said. “When it’s there on the page, it’s easy for the student to just accept it. It’s very confusing for students and families. … Many students don’t even realize that some loans are private.”

For-profit colleges are particularly egregious offenders in failing to help incoming students secure affordable federal loans, according to TICAS.

One large for-profit school—unnamed in the report—“responds to requests for private loan certification by approving the request without contacting the student.” That student is then stuck with a private loan that will cost thousands more over the life of the loan.

San Diego State University (SDSU) is among campuses that have made sure students examine their fixed-rate federal loan choices before they resort to private college loans.

With its own online counseling tool, SDSU requires students to complete a counseling session and complete a Free Application for Federal Student Aid (FAFSA) “before the school will certify a private loan,” according to the TICAS report.

SDSU’s online counseling system “ensures that private loans the college is aware of will only be used to cover expenses that could not have been covered with federal student loans,” according to TICAS. The university’s requirements have paid off for many incoming students: Nearly half of those who applied for a private loan did not complete with application.

Colorado State University (CSU) takes one of the most proactive approaches to dissuading students from using private college loans. For 15 years, CSU counselors have called prospective students to tell them about the advantages of federal student aid. Half of students contacted by the university decide to exhaust their eligibility for federal student loans before turning to private loans, according CSU statistics.

Syracuse University and the University of California-Berkeley require counseling for current students who haven’t maximized their eligibility for federal student loans. The TICAS report highlighted Syracuse for replacing private loans with grants “for students in danger of accumulating excessive debt.” These students must attend financial literacy seminars as a condition of the loan assistance.

Mark Kantrowitz, publisher of and, popular student aid resource sites, said the U.S. Department of Education’s “Federal Aid First” initiative has helped raise student awareness of low-interest government loans.

Still, first-generation college students remain susceptible to private loan options presented during counseling sessions.

“I think families are becoming more aware of the risks after they are already in college, but there’s still a lot of room for improvement with first-time college students,” Kantrowitz said. “In some cases the dream is driving the debt, where a student has his or her heart set on a college they can’t afford, so they borrow to pay for it without paying much attention to how they’ll be able to repay the debt or how much it will cost to repay the debt.”

Kantrowitz pointed to recent statistics showing that college students aren’t maximizing federal student loans.

One-quarter of students eligible for federal student aid didn’t borrow from the federal Stafford loan program, and almost four in 10 students borrowed less than the Stafford loan limit, according to Kantrowitz’s research. Those who don’t maximize their federal student aid account for 1.8 million students nationwide.

The percentage of students who didn’t use their maximum federal aid jumped from 2003 to 2008. Kantrowitz said 48 percent of student borrowers didn’t maximize federal student loans before turning to private loans during the 2003-04 academic year. In the 2007-08 school year, that number increased to 62 percent.

The TICAS report cited two unnamed medium-sized public campuses that don’t certify private college loans at all. Both schools receive very few private loan requests, but any inquiry about private loan options is met with a phone call from a counselor explaining other loan options.

This approach, the TICAS report said, was not among higher education’s best practices.

“[A] policy of never certifying private loans may not be flexible enough to address all situations, and could result in students turning to more costly uncertified private loans or other types of borrowing,” the report said.

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