Ball State University sophomore Samantha Knaack often deletes e-mail messages related to her student loans because she doesn't want to look at the amount she owes.
Knaack said she couldn't get federal financial aid because her father made too much money, so she turned to a private lender. The first person in her family to attend college, she already owes more than $21,000.
"I'm looking forward to graduation in one sense," she said. "But absolutely terrified of it in another."
Knaack said she did not know about unsubsidized Stafford loans, which all students studying at least half-time who fill out a FAFSA can take out, regardless of need.
Knaack belongs to a growing group of American undergraduates. With college costs rising and federal aid failing to keep up, even as Congress moves to lower interest rates on federal loans, more students are taking out private loans.
Even though the total federal student loan volume of $69 billion dwarfs the $16 billion volume of private student loans, private loans are increasing at more than three times the rate of federal loans, according to a report released in December by the Institute for Higher Education Policy. Some experts speculate that private loans could exceed subsidized Stafford loans by the end of the decade, given current trends.
Many lenders allow students to borrow the entire cost of paying for college, up to aggregate limits of $50,000 or more.
Lenders base interest rates and eligibility on default risk rather than need.
Students who take out private loans often don't know what they're getting into.
"Students don't read all of the information that is available as carefully as they should," Robert Zellers, Ball State Office of Scholarships and Financial Aid director, said. "Some of us tend to make a lot of assumptions about things. Instead of reading the fine print, we don't."
Private loans have high interest rates and can't be consolidated with federal loans. According to the IHEP report, not everyone receives perfect information about financial aid.
Knaack said her parents were unaware of the interest rates on her loans, and that interest would capitalize while she was in school.
Still, students can take out $23,000 in Stafford loans while in school. Starting July 1, the Department of Education will increase the amount dependent freshmen and sophomores can take out per year. The amount freshmen can take out will increase from $2,625 to $3,500, while the grade-level cap for sophomores will increase from $3,500 to $4,500. The aggregate limit, however, will remain at $23,000, and the grade-level caps for juniors and seniors will remain at $5,500 per year.
Private lenders such as the Student Assistance Foundation advertise their loans as a way to fill in the gaps left by federal financial aid, scholarships and savings.
Many borrowers, according to the IHEP report, perceive private loans as more convenient than federal loans, but remain unaware of the potential costs.
"For independent and low-income students, costs may be particularly severe," according to the report.
Knaack said her parents were not concerned and promised to pay off her loans, but she feared they only sought to placate her.
"I think they're just saying that so I'll stop worrying about it," she said. Nevertheless, she said she would continue taking out loans.
Zellers, however, said students had a number of ways to avoid private loans.
He said students should avoid borrowing if they can and only borrow what they need. He has seen a number of cases of discretionary borrowing, he said.
"I really do believe we have some students who borrow ... because they can," he said.
To offset the need to borrow, Zellers said students should get into the habit of saving, especially by working part time and during the summer.
QUESTIONS and ANSWERS:
What is the difference between federal and private loans?
Federal loans come from the government; private loans come from private lenders. Federal loans, such as Stafford and PLUS loans, carry fixed interest rates; private loans carry variable interest rates.
What private lender offers the lowest rate?
Among lenders on Ball State's preferred lenders list, Citibank and Sallie Mae offer rates as low as the Prime Rate minus .5 percent, totalling 7.75 percent. However, rates may be higher depending on the borrower's credit.
What if I can't make payments?
In the event of in-school status, financial hardship, military service or other circumstances, you can get a deferment on a federal loan. On private loans, your ability to defer payments is at the lender's discretion.
What if I stop making payments?
If you miss one payment, your loan will be considered delinquent. If you keep missing payments, it will go into default, and the lender will report your default status to national credit bureaus.
How is my margin calculated?
The margin is often based on your credit rating and default risk. If you have a low credit rating or the lender considers you at high risk of default, it will add a higher margin to the Prime Rate or LIBOR.
Sources: The Institute for Higher Education Policy, SallieMae.com, Collegelenderlist.com
Why do students take out private loans?
- To cover education costs not covered by federal loans, grants, scholarships and savings.
- To avoid having a job during school.
- To afford enrollment at private colleges.
- Lack of knowledge of federal student aid.
Some students take out federal and private loans without knowing what they're getting themselves into. Below are terms borrowers should know.
federal loans - Loans made by the federal government such as the Stafford, Perkins and PLUS loans.
private loans - Also known as alternative loans. Made by private lenders such as banks and student loan companies.
Prime Rate - A rate based on the Federal Reserve's Federal Funds Rate. The Prime Rate was 8.25 percent Tuesday. Many lenders use the Prime Rate as a benchmark, or standard interest rate.
LIBOR - An acronym for London Interbank Offered Rate, which many lenders also use instead of the Prime Rate. The three-month LIBOR, used as a benchmark for many private loans, stood at 5.36 percent Tuesday.
margin - The rate an individual lender charges on top of the Prime Rate or LIBOR. If a lender advertises a rate of "LIBOR + 2.00%," that means it charges 7.36 percent interest on a loan.
interest capitalization - The compounding of interest on unsubsidized and private loans.
deferment - A period when a borrower can suspend making payments. Lenders usually grant deferments because of enrollment in school, economic hardship, military service or other situations.
forbearance - A period when a lender doesn't require the borrower to make payments, but may still charge interest.
default - When a borrower fails to make payments on a loan. Defaulting on a student loan can seriously damage a borrower's credit rating, making him or her unable to obtain credit in the future.
consolidation - When a borrower groups all of his or her loans together into a lump sum at a fixed interest rate. Different federal loans can be consolidated, but federal and private loans. can't be consolidated together.
By the numbers:
| 8 percent: | Rate of growth of federal loans 2003-2008 |
| 25 percent: | Rate of growth of private loans 2003-2008 |
| $69 billion: | total volume of federal loans 2005-2006 |
| $16 billion | total volume of private loans2005-2006 |
Sources: Bloomberg.com, Institute for Higher Education Policy, College Board
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