Colorado State Does Student Loans Right

At Higher Ed Watch, we are deeply concerned about students who borrow high-cost private loans before exhausting their federal student loan eligibility. Non-federal, private student loans carry up front fees equal to as much as 10 percent of principal borrowed and interest rates that reach in excess of 18 percent. In contrast, federal Stafford loans have an interest rate of 6.8 percent.

No student should assume a private student loan before exhausting their federal loan eligibility. Yet they do. This alarming trend finally has made it onto the radar screen of policymakers. And some college financial aid offices are starting to do something about it, following in the footsteps of at least one that has been pursuing the issue for more than a decade.

Earlier this month, the Senate Banking Committee, under the leadership of Sen. Christopher Dodd (D-CT), approved a bill that would require lenders to inform private loan applicants of the availability of lower cost federal student loans. That's a good step. But lender supplied disclosure warnings aren't going to reach every student. Lender disclosure statements need to be complemented by the front-line work of financial aid offices. College financial aid administrators have an ethical responsibility to protect students from taking on unmanageable levels of high cost educational debt. We're happy to report that some financial aid officers are taking this responsibility very seriouslyproactively counseling students to make sure that they are fully informed about their loan options.

In July, Inside Higher Ed profiled the work of the financial aid office at Barnard College in New York. Alarmed by the sharp growth of private loan borrowing at the school, aid administrators decided to require students or their parents to speak to an aid counselor before certifying any private loan. Barnard wanted to ensure that students and their families were fully informed about the availability of federal student loans; the terms and conditions of private loans; other federal loan options, such as PLUS loans for parents; and the different, potentially payment options.

After one year, the results at Barnard were shocking: private loan volume plunged 73 percent, or by more than $1 million. The number of students taking out private loans dropped to 36 in 2006-07, down from 98 a year earlier. And Barnard officials said that many students who had to take out private loans got better deals after counselors helped them navigate offers with different private lenders.

As the Barnard example shows, proactive counseling can go a long way in preventing students from making bad decisions that will haunt them well after they leave college. But are similiar efforts feasible at larger universities with enrollments that exceed Barnard's 2,400 students?

Our own research answers the question with a definitive "yes"at least at Colorado State University, which enrolls more than 20,000 undergraduates and about 4,000 additional graduate students. For more than a decade, financial aid administrators at Colorado State, which participates in the federal Direct Loan program, have been concerned about students unnecessarily taking out non-federally guaranteed, private loans. And they have been doing something about it.

As a school that is about 10 times as large as Barnard, Colorado State officials realized that they didn't have the capacity to contact each and every borrower who applied for a private student loan. Instead, they decided that they would target private loan applicants who have not exhausted their federal loan eligibility. When private loan applications come in, the financial aid office flags students who either have not filled out a FAFSA or already have federal loans but still have eligibility remaining.

According to Carla William, the Associate Director of Fiscal Operations at Colorado State, approximately 20 percent of private loan applicants at the school fall into this category Her office then calls these students and counsels them on the availability of federal loans. William estimates that approximately 50 percent of students who receive phone calls are persuaded to exhaust their federal loan eligiblity before taking out private loans.

When we asked why the other 50 percent refuse to take out federal loans, William describes some students as being "leery of giving information to the federal government." She says that some people in Colorado dont want to get involved with federal loans and, despite the offices attempts to convince them otherwise, believe that taking a private loan from their local bank (which theyve used their entire lives) is "safer." Other students have parents that are unwilling to borrow PLUS loans, leaving the student with no alternative but to take a private loan.

In any event, through its targeted counseling efforts, Colorado State helps an estimated 10 percent of borrowers who have applied for private loans get much better deals than they otherwise would, and in turn avoid unnecessary debt. And William estimates that these calls take only 10 hours a week. Its a simple idea, really: make sure students have filled out the FAFSA, make sure they are exhausting their federal loan eligibility, and then certify their private loans.

If Colorado State can do it, so can other large public and private universities. Other schools may currently have similar efforts in place. If so, we want to hear about it. Send us what your financial aid office is doing about skyrocketing private loan volume. Write a comment. Shoot us an e-mail. We at Higher Ed Watch want to spread the word that these efforts are both feasible and effective.