All loans are not equal

By Steve Delperdang
and Brennan Lane

Each year, 12 million Americans, or 60 percent of college students, borrow money to cover college-related expenses, according to the Chronicle of Higher Education.

Yet many students remain uninformed of the differences between basic loan types and the effect of each on their financial future.

The basic difference between federally funded loans and private loans is their source. Federal loans are issued by the government. Private loans are provided by a creditor, such as a bank or a credit union. But the differences between federal and private loans go beyond this to include — among other things — repayment requirements, options and rates.

Additionally, student loans are one of only a few types of debt that may not be discharged through bankruptcy.

In light of these issues, the federal government is working to maintain interest rates well below those of private loans. Last June, Congress voted to prevent federal student loan debts from doubling to 6.8 percent for subsidized Stafford loans.

But they were just able to meet their July 1 deadline and extended the rates for only one year. As part of this deal, students are able to study for an undergraduate degree for six years before beginning to accrue interest on their federal subsidized loans. The rate was 6.8 percent in 2007, until Democrats took control of the House and were able to lower rates to their current level of 3.4 percent.

Graham junior Steven Bell said he feels comfortable using federal loans to attend Baylor.

“I think federal loans are easier to deal with because there’s more resources available to answer questions and help you along the way,” Bell said.

Federal loans do not require repayment as long as a student is enrolled in 12 or more credit hours of classes. If the federal loan is subsidized, the government will defer interest while the student is enrolled in six or more credit hours of classes. In contrast, repayment timelines for private loans vary widely, and some accrue interest while a student is still in school.

Additionally, if a student has difficulty repaying a federal loan, options such as forbearance and deferment may allow him or her to temporarily postpone or lower payments. Such options rarely are provided for private loans.

Sandra Frank said, “At Wells Fargo, we don’t require a payment on student loans until six months after a student graduates college, as well as, allowing a parent or guardian to cosign the loan for a faster approval from the bank.” Frank is an employee of Wells Fargo, a bank that provides private student loans.

Both subsidized and unsubsidized loans have a fixed rate that is usually competitive with private-sector loans.

Federal direct subsidized loans are now at a fixed rate of 3.4 percent, and direct unsubsidized loans have a fixed rate of 6.8 percent.

However, private loans tend to be more variable, even for the same borrower. According to All Tuition, a unified application for financial aid, the industry average is between 9 and 12 percent. Market factors, the type of lending institution and the student’s credit score may contribute to interest rate variance on private loans.

Finally, unlike federal loans, private loans often require a cosigner, typically a parent or family member. But parents may be hesitant to cosign loans because doing so may expose them to future financial risk.

For example, Baylor parent Donna Crouch said of cosigning a loan for her daughter, a senior, “I need to save for my retirement and doing this would really make me nervous … I’d do anything for my daughter, but if there were any other way, I wouldn’t cosign.”

Austin senior Casey Anderson describes her student debt package as a mix of federal subsidized and unsubsidized loans. Anderson turned to her parents for advice when making her financial aid decisions.

“My parents made most of the decisions,” Anderson said. “I guess I could have done some more research, but I trusted them to handle it.”

Anderson said she would have made the same decision whether her parents had been involved in the decision-making process or not.

“I definitely would have opted for government loans,” Anderson said. “It doesn’t take a lot of research to know that money from the government is generally cheaper than money from a bank.”

Anderson isn’t the only student relying on parents and conventional wisdom to inform college financing decisions. Houston senior Mitchell Crimi had a similar experience.

“I usually leave those types of decisions to my dad,” Crimi said. “He knows way more about finance than I do, and I have a short attention span.”

When asked for the key factors in their parents’ decisions, both students listed recommendations from family friends among considerations such as loan accessibility and interest rates.

“I just remember my mom talking to a bunch of friends whose kids were in college,” Anderson said. “I’m sure she looked at different rates, but I know most people she talked to had federal subsidized or unsubsidized loans.”

Crouch also sought recommendations from family and friends when contemplating student loan options for her daughter and recalls speaking with other co-workers.

“Nobody I talked to used private loans, but I didn’t talk to a lot of people … Everyone said federal loans offer better rates,” she said.

Despite low rate recommendations from family friends, Anderson and Crimi, like many students, will graduate from college with roughly $10,000 and $20,000 dollars of debt, respectively.

In fact, student debt in America now exceeds $1 trillion, according to a 2012 report from American Progress, a nonpartisan educational institute based in Washington, D.C. Of this debt, $864 billion are from federal loans, and $150 billion are from private loans.

American Progress cites increases in tuition as one of the driving factors responsible for the growth in student debt. In fact, the organization reports a 1,000 percent increase in the cost of a college degree over the last 30 years.

Both public and private universities have reported such tuition increases. Baylor’s Board of Regents voted last year to increase undergraduate tuition by 6.5 percent, or $1,866 for 12 hours, bringing tuition to an average of about $15,000 per semester.

While tuition is increasing, for many students, their scholarships aren’t adjusted to cover the increase.

Katy senior Henry Li’s scholarships nearly covered his tuition at the start of his academic career, but as tuition has risen, and his scholarships have not, Li found himself accruing more debt.

“My tuition kept going up, but my scholarship amount wasn’t changing,” Li said. “I had to take on several hundred extra dollars in student debt each semester to cover the difference.”

Not surprisingly, the 2008 recession had a large effect on tuition increases and scholarships. During this period, both high school graduates and working adults entered higher education in record numbers, driving up the total amount of student debt.

The Federal Reserve Bank of Chicago released a report showing an increase in enrollment from 2007 to 2010 that was 2.1 million people greater than what was expected based on enrollment from 2004 to 2007.

The negative effect of the recession on scholarships results from a decrease in public university endowments. As less money is available to provide students with scholarships and grants, more students must apply for loans.

However, while students at both public and private universities have seen tuition increases and reduced scholarship packages, those at private universities have experienced the greatest increase in student loan debt.

According to the American Progress report referenced above, 86 percent of freshmen attending private colleges now take out student loans—a sharp increase from the 62 percent who took on college debt in 2001.

Despite the rise in both the number of students in debt and the amount owed, neither Anderson nor Crimi regret their absence in the loan decision-making process.

“I wouldn’t do anything differently,” Anderson said. “I’m pretty sure my parents plan to pay off my loans after I graduate, so I figure it’s best that they made the final decision.”

While students like Anderson may not be directly affected by their financing choices, others, like Crimi, must live with their decision long after graduation.

According to the Consumer Financial Protection Bureau, the U.S. federal agency responsible for regulating consumer financial products, the “standard repayment schedule is 120 months (10 years).”

“I’m not too worried,” Crimi said. “Almost everyone is graduating with debt nowadays … The numbers are so high that I really don’t trust anyone but my parents to make the decision.”