Current students and many parents did not understand the significant differences between federal and private student loans.Other than knowing the names of federal loans (e.g., Stafford and Perkins), parents and students could not recall interest rates or eligibility criteria for federal loans. They did not realize that federal loans have fixed interest rates whereas most private student loans have variable interest rates, and most have no cap on that rate’s upper limit. Nor did they know that private student loans usually have more onerous terms (e.g., repayment penalties), and less flexible repayment options than federal loans.
Students were generally unaware that private student loans charged variable interest rates based on the borrower’s credit score. Indeed many thought the rates for federal and private student loans were the same. This confusion could be, perhaps, because a lender can offer a student both a federal Stafford loan and a private student loan. A sophomore at a Los Angeles-area community college who had a private student loan at 11% wanted to know “what the catch was” for 6.8% interest rate for federal Stafford loans. They also expressed confusion over the concept of interest capitalization.
Student and parent borrowers of private student loans, especially those who did not qualify for federal Perkins or subsidized federal Stafford loans, believed it was not worthwhile to complete the FAFSA to qualify for an unsubsidized federal Stafford loan. A typical comment illustrating this point was made by a sophomore at a four-year public school in California when he said that “the [Federal] government doesn’t really help you out [in paying for college].” For those students and parents with some financial sophistication, concerns about the terms and conditions of private student loans, included information on:
- Interest rates – fixed or variable over the loan’s term;
- Minimum monthly payments;
- Disbursement fees;
- If a variable rate, the monthly repayment amount that could be required if the
- interest rate rose to the maximum amount;
- When the borrower becomes responsible for interest payments;
- When repayment starts;
- Interest capitalization;
- Projections of interest paid over the term of the loan; and
- Penalties for early repayment.
Student and parents wanted the private student loan information in simple terms, with explanatory text next to the numbers. They also expressed a strong preference for customized information that was specific to their loans. A recent graduate now working in New York with a monthly student loan repayment amount of $1,000 described how she, “kind of felt like not enough information was given, because I was kind of like, walking in the dark.”
Students and parents turned to varied sources for advice about federal and private student loans. The main sources included family (parents and siblings), friends, and the college’s financial aid office (and the college’s financial aid website). Parents and students alike referred to financial magazines, and a couple of the two-year students used books and resources including librarians/personnel at the public library. Students and parents used the Department of Education’s (ED) FAFSA site, and a variety of websites such as fastweb.com (for scholarships), daveramsey.com, clarkhoward.com, collegeboard.com, salliemae.com, Yahoo! Finance, and the Motley Fool (fool.com). Many students simply typed “student loans” in an Internet search engine.
The students also reported that they were bombarded (from junior year of high school through at least college graduation) with loan solicitations from private student loan lenders both in the mail and via email. For example, a senior at a public four-year university in Atlanta explained how he received private student loan marketing materials with come-ons like, “This is your third notice, apply now for [a student loan].” To a lesser extent high school guidance counselors provided advice, but students and parents often said the advice was limited to help in filling out the FAFSA and other college entrance materials, rather than help identifying affordable loans. In an ideal situation, many parents and students would use a non-profit, thirdparty source to help them learn about, and evaluate, their loan options. The key was that the website had to have visibility, possibly connected with the school’s financial aid office. A sophomore at a two-year school in Boston highlighted the need for visibility of trusted information because “the private loan companies are very visible, you have to compete with them.”
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