Private loans’ popularity soars with interest rates
Raveca and Octavian Pintea ran an elderly care facility in California before coming to the University of Nevada, Reno.They saved to pay for their first semester in the nursing program out of pocket. And while the business pulls in about $100,000 a year, profit margins are much less, Octavian Pintea, 27, said. As tuition and books soared to $4,000-plus for each of them, they looked for loans.
“We needed them (loans) to continue school,” Octavian Pintea said. “Our previous semester we didn’t have to take so many credits so we could pay for it out of pocket.”
They said they didn’t bother with the federal aid application – it took too long and the business’s high earnings stopped them from getting enough money anyway. So they shopped around to find the lowest rates before taking a $20,000 loan from their bank, Wells Fargo.
But the lowest interest rates are growing. And so is student reliance on private loans.
Mark Kantrowitz, publisher of FinAid.org, boosted his definition of the “best” student loans by about half a percent last week. But the best rates only apply to about a fifth of borrowers, according to FinAid.org.
The rest of students face rates of up to double the federal Stafford loan’s 6.8 percent. Some loans also tack on fees of up to 11 percent of the loan.
A person needing $20,000, like the Pinteas, could end up paying more than $69,000 over a 20-year period – almost $300 a month – if they have bad credit.
The Pinteas said because of low rates and their pursuit of high-paying careers, the debt doesn’t worry them that much. But Renée McCloud, UNR loan coordinator, said she worries other students may fall victim to high interest.
“The problems in the student loan industry come from private lenders, (that is) where students say ‘oh, I’m over my head,’” McCloud said.
Six times as many UNR students took out school-certified private loans this school year as compared to 2000-2001. The dollar amount, about $2.5 million, is nine times that of 2000-2001.
Nationally, private loans accounted for almost a quarter of all loans, or about $19.5 billion, last year.
McCloud said students turn to private loans when they don’t qualify, or think they don’t qualify, for federal money because of bad grades or wealthy parents.
Janice Walker, spokeswoman for lending facilitator First Marblehead Corp., said private loans “fill the gaps” between federal aid, scholarships and tuition.
The so-called “credit crunch,” stemming from unpaid home loans, has made lenders more cautious of unsafe loans, Kantrowitz said. Walker said the shaky market, combined with the nature of student loans, drives the interest rate increase.
First Marblehead wants people to explore all financial options and, if they choose a private loan, to find a cosigner, Walker said. She said a cosigner eases concerns of the borrower defaulting – which in turn eases interest rates.
“We don’t want students to take out more than they can afford,” she said.
McCloud encouraged all students to come to the UNR financial aid office before taking out loans. McCloud said if a student can’t secure federal aid, her office will push them toward a more regulated UNR-certified loan.
Above all, the loan experts said students should avoid debt from piling up by budgeting now.
“Live like a student while you’re in school so you don’t have to live like a student when you graduate,” Kantrowitz said.
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February 20th, 2008 at 4:07 pm
“They said they didn’t bother with the federal aid application – it took too long and the business’s high earnings stopped them from getting enough money anyway. So they shopped around to find the lowest rates before taking a $20,000 loan from their bank, Wells Fargo.” That statement deeply concerns our office. An application “taking too long” is worth taking out a variable interest rate loan vs. a low 6.8% interest rate that is federall guaranteed? We urge the students to take greater responsibility with their future earnings. $20,000 is a huge amount to be borrowing from a private lender that has a variable interest rate, componding interest and fees. Please talk to the financial aid office first and even ask to have the private loan switched to federal funds later if timing is an issue.