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Students Turning To Federal Loans More

By CityTownInfo.com Staff
October 26, 2009

New data indicates that students are increasingly relying more on federal financial aid to finance their higher education rather than more expensive private loans.

According to one of the reports issued last week by the College Board, the amount of private education loans in 2008-9 fell dramatically by 52 percent. Students and their families borrowed about $11 billion in private student loans that year, down from $22.8 billion in 2007-8. In the latter year, private student loans made up 25 percent of the market, while they fell to just 13 percent just a year later.

"I think what we are seeing here reflects the enormous credit tightening that occurred in the economy," explained Terry Hartle, senior vice president of the American Council on Education, a college trade group, who was quoted in The Wall Street Journal.

But experts say that the decrease in private student loans can be attributed to others factors as well: As more parents lose jobs, more families qualify for federal student loans. The government, meanwhile, has boosted efforts to provide more student loans by raising federal lending limits. Last year, total federal loan limits increased from $23,000 to $31,000 for dependent undergraduates, and from $46,000 to $57,500 for independent undergraduates.

Others point out that the trend is a positive one because federal student loans are far less expensive than private ones. "Students should always borrow federal first, as federal loans are cheaper," explained Mark Kantrowitz, publisher of FinAid.org and FastWeb.com, who was quoted in The Washington Post.

For example, the interest rate on federally subsidized Stafford loans was at 6 percent in 2008-9, dropped to 5.6 percent in 2009-10, and is scheduled to decline to as low as 3.4 percent in 2011-12. Interest rates for private student loans, by comparison, range from about 9.5 percent to 10 percent, and the rates are not fixed. Federal loans can also sometimes qualify for loan forgiveness or more flexible repayment options, such as the new Income-Based Repayment program.

But experts warn that any increased lending is not necessarily a good trend. "Absolutely, it's great that private loan borrowing is down, but with one caveat," said Tim Ranzetta, president of Student Lending Analytics, which provides research and advisory services to college financial aid officers, who was quoted by The Post. "Is this going to lead to over-borrowing with federal loans?"

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