How Student Loan Borrowers Are Getting Into Trouble

Last Updated Oct 24, 2011 1:09 PM EDT

When borrowing for college, private college loans are the scariest option.
Private student loans don't provide the protections that federal students loans offer and yet a new federal study suggests that an alarming number of college students are turning to private lenders before they've taken full advantage of their federal options.

Among student borrowers, only 46% maxed out their federal Stafford Loans, which are the best loans for student borrowers, before turning to less desirable private loans.

Here are more facts, compiled by the U.S. Department of Education, about what borrowers are turning to private student loans to pay for college:

1. Eleven percent of borrowers applied for federal financial aid, but never took advantage of the more attractive federal loans.

2. Among undergrads, 12% who took out private loans never bothered to file for federal financial aid, which would have qualified them for federal loans.

3. Nine percent of undergrads borrowed exclusively from private sources. Strangely enough, 21% of borrowers attending community colleges relied exclusively on private loans.

4. Thirty one percent of borrowers took out Stafford Loans, but didn't borrow the maximum before turning to private lenders.

5. Sixty three percent of undergrads who borrowed, did so exclusively through public lending programs.

6. Not surprisingly, the higher the tuition, the greater the rate of private borrowing. About a third of the students attending schools where the tuition was $10,000 or higher relied on private college loans. In comparison, 22% of students with tuition in the $5,000-to-$9,999 range turned to private loans.

7. Borrowing through private college loans was more common for middle-income students than low-income undergrads.

8. The largest proportion of student borrowers who took out private loans either exclusively or in combination with government loans were enrolled in for-profit schools.

You can learn more about private student borrowing by reading the new report, The Expansion of Private Loans In Postsecondary Education. The government used statistics from the 2007-2008 school year, which was when private education loans were estimated to have reached a peak at $22 billion. When the recession hit, private loan volumes declined.

Bottom Line:

Clearly more college students need to understand what that federal loans are the best options.

Who should be helping students make the best choices? Colleges are the most logical answer. The institutions are notified about where their students are borrowing and they should intercede when their undergrads are on the verge of making poor choices.

Read More on The College Solution:

2 out of 3 Student Loan Borrowers are Struggling
The Secrets of Attending College Without Student Loans
Student Debt: Don't Borrow More than $27,000
Lynn O'Shaughnessy is author of The College Solution, an Amazon bestseller, and Shrinking the Cost of College workbook. She also writes her own college blog at The College Solution.
Student loan image by photosteve101. CC 2.0.

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