Press Releases

TERI / NASFAA – Results of Private Loan Study

Soaring private student loan funds becoming major factor for students to choose which college to attend

Private loan volume now more than $5 billion, a 346% increase since 1995-96. Many borrowers attend high-priced schools and “max out” on federal loans
Comprehensive study examines who borrows and why, what colleges do, and how lenders package/market loans.

WASH, D.C. – A major new national study of the rapidly growing private student loan market says that non-governmental loan funds are becoming a critical factor for college students deciding where to go to college. Private loans are increasingly being used to pay for higher-priced colleges and have become a crucial source of support for students attending law school, medical school, and other professional programs, the study says. Private loans also are being used to cover the growing gap between the amounts students and families are willing or able to pay for college and the actual costs of attendance after other aid is taken into account. Many private loan borrowers already borrow the maximum for which they are eligible under federal loan programs.

With college costs increasing faster than increases in federal student aid, federal aid programs are now sharply focused solely on whether students can go to college – that is, supporting “access” to higher education. This means that other forms of aid, especially private loans, are becoming a major resource that allows students to choose which college to attend, according to the report. Though private loans make up only a small portion of the total student loan volume — the $5+ billion annually in private loans is dwarfed by the more than $40 billion in federal student loans — they are the fastest growing form of student aid and have now surpassed other, and often better-known, forms of assistance. Private loans now account for more than the total amount awarded by the federal government under the Supplemental Educational Opportunity Grant, Work-Study, and Perkins Loan programs combined.

The report, “Private Loans and Choice in Financing Higher Education,” was produced by the Institute for Higher Education Policy with support from The Education Resources Institute (TERI), and the assistance of the National Association of Student Financial Aid Administrators (NASFAA).

Key findings include:

  • Three groups of students are most likely to borrow private loans: traditional undergraduates at relatively high-priced, private four-year institutions; undergraduates who face high non-tuition costs such as room, board, and other living expenses; and professional school students, particularly law and medical school students, who face high tuition prices and have high financial need.
  • A high proportion of private loan borrowers also have borrowed the maximum annual amounts allowed under federal programs: 77 percent of professional school students, 50 percent of undergrad’s, and 32 percent of graduate students also had maxed out on their federal Stafford loan eligibility.
  • The reasons for borrowing most commonly cited by financial aid administrators were related to the students’ financial need, including unmet need, high costs of attendance, and federal loan limits.

Lenders are responding to the market need by providing numerous private loans with different types of terms and conditions – what lenders refer to as different loan “products.” These have become more diversified in recent years due in large part to increased demand for additional sources to finance postsecondary education and willingness of lenders to develop products to meet the needs of different segments of the education loan market. The number of private loan products grew by 244 percent, increasing from 79 in 1997 to 272 in 2003. Some private loan products have competitive interest rates or other terms and conditions that allow them to compete favorably with federal student loans.

The study offers timely information to policymakers as they consider changes to federal aid programs under the Higher Education Act, according to Jamie P. Merisotis, President of the Institute for Higher Education Policy. “We now know that private loans play a pivotal role in the decision-making of many students and families, and they need to be elevated in the discussion of how to pay for college,” he said. “As Congress undertakes the reauthorization of the Higher Education Act, the private loan market is likely to be a key point of discussion and debate.”

The report draws upon nationally representative data, including the National Postsecondary Student Aid Study and the Survey of Undergraduate Financial Aid Policies, Practices, and Procedures, along with data from the College Board and the Greentree Gazette, a business magazine for higher education. The report also presents new, original data from a survey of student financial aid administrators and from focus groups with lenders and financial aid professionals across the country.

The Institute for Higher Education Policy is a non-profit, non-partisan research organization whose mission is to foster access and success in postsecondary education through public policy research and other activities that inform and influence the policymaking process. Information about the partner organizations involved in this report is available online at for TERI, and for NASFAA.