Blog Post | July 31, 2007

Changing the Conversation

Author: By Deborah Frankle, Research Analyst

Private or alternative loans comprise a growing share of student loans, despite being more costly than federal student loans. Students and parents are often unaware of the differences between private and federal loans, and many borrowers don’t know which they have until they enter repayment. Unfortunately, despite required informational sessions about federal loans, the majority of college financial aid offices are not doing much to educate students about private loans.

The National Association of Financial Aid Administrators (NASFAA) recently conducted a survey of how financial aid offices discuss alternative loans with their students, results of which can be found in their magazine, Student Aid Transcript. The survey results showed that 63% of financial aid offices do not address alternative loans at all during entrance and exit counseling, the information sessions required when federal loans are taken out and again when the student leaves school. And while 58% of financial aid offices do provide more information about financial planning and debt management than they are required to, only 25% offer in-depth counseling on alternative loans specifically.

Barnard College recently became part of this minority by requiring students or parents who apply for a private loan to talk with the financial aid office before Barnard will certify a students’ enrollment (and access to the loan). The goal of these conversations was not to discourage people from taking out private loans, but just to be sure that they understood the differences, cost, and potential consequences involved.

Still, this simple policy change reduced alternative loan volume by 73% in one year. The college found that many who initially wanted an alternative loan were not aware of the associated risks and interest rates, and had not fully considered other viable options. Such a huge drop in private loan volume suggests that the students who were initially drawn to these loans might not have really needed them.

Preventing unnecessary and risky borrowing is good for students, and should be a goal of all financial aid counselors. If the drop in alternative loan volume experienced by Barnard College is anything near the potential alternative loan decreases possible at other colleges, the 73 of college financial aid offices that do not currently guide students through these decisions should consider doing so.