Private Student Loan Borrowing Surges Despite Higher Costs

By Dawn Handschuh, Personal Finance Writer   

The number of undergraduate college students who borrowed private student loans increased significantly in the past four years, from five percent in 2003-04 to 14 percent in 2007-08, according to new data released by The Project on Student Debt. 

The jump in private loan borrowing was even more pronounced at for-profit colleges and universities; in 2003-04, 13 percent of students at for-profit schools turned to private student loans, while 42 percent of students relied on them last year. In addition, students at pricier colleges were more likely to borrow private loans last year. For example, schools where tuition and fees exceeded $10,000 enrolled about 16 percent of all undergraduates, but these students represented a disproportionate share of private student loan borrowers, at 37 percent.

Private student loans carry higher, variable interest rates and few repayment options. They're also viewed by financial aid experts as the least desirable college financing option compared to other alternatives, such as need-based grants; federal PLUS loans; or government-backed Stafford loans, which are awarded to any student, with no family income or credit score criteria, at a reasonable 6.8-percent fixed rate. 

The Obama administration recently expressed its intent to eliminate $94 billion in loan subsidies to the private student loan industry, claiming that removing middlemen lenders could make the federal student loan program more efficient overall and more affordable for needy students. 

Despite the indisputably higher cost of private student loans, data from The Project on Student Debt show that 14 percent of private loan borrowers failed to apply for federal financial aid. What's more, 26 percent of private loan borrowers didn't take advantage of cheaper Stafford loans first, despite their more favorable rates and terms.

The Project on Student Debt analyzed data from a federal survey of college students by the National Center for Education Statistics, which was released in April 2009.

The private student loan industry has come under increased scrutiny due to its questionable marketing practices, according to the New America Foundation. 

At the same time, the challenges faced by recent college graduates saddled with staggering amounts of high-cost debt have attracted greater attention in recent years as college tuition rates have gone through the roof.