Entrance Counseling for Private Loans? (Updated)

As I was thinking more about the recent actions taken to assist private student lenders and the resultant controversy, I wondered why private loan borrowers, unlike federal loan borrowers, are not required to undergo "entrance counseling." 

 Entrance counseling is a requirement for students taking out federal Stafford and PLUS loans, as the Direct Lending site indicates:

Step 2: Select Your Loan Type

Why is Loan Counseling Important? Helps you understand your rights and responsibilities as a student loan borrower Provides information and terms to help you make the right choices Your school requires you to complete Entrance and Exit Counseling

Continuing your education is a major investment for your future. If you decide to make loans a part of this investment, managing the debt you incur is a major responsibility. To ensure that you understand this responsibility and the obligation you are assuming, the Federal Government requires you to participate in loan counseling prior to receiving a Direct Loan, if you have not previously received a Direct Loan, Federal Family Education Loan, or Supplemental Loans to Students (SLS) Loan.

Check with your school to make sure this session will satisfy your school's requirements for Entrance Counseling.

You can add additional schools that you want to receive your Entrance Counseling results in the "Review the Results" session.

Stafford Loan Undergraduate and graduate or professional students may receive Direct Stafford Loans. (Learn more about Stafford loans) Tutorial and Quiz (New Session) Review Previous Results

PLUS Loan Graduate or professional students in a graduate program may receive a Direct PLUS Loan. (Learn more about PLUS loans) Tutorial and Quiz (New Session) Review Previous Results

Combination - Stafford and PLUS Loans Graduate or professional students in a graduate program may receive both Direct Stafford Loans and Direct PLUS Loans. (Learn more Stafford and PLUS Loans) Tutorial and Quiz (New Session) Review Previous Results

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Recent news reports have indicated that while only 8% of college students take out private student loans, private loans account for 22.2% of all student loan volume (federal and non-federal) for 2007-08, according to the College Board.  This relationship indicates that the average private loan balance tends to be much larger than the average federal loan (Stafford, PLUS and Grad PLUS).  Yet, while the federal loans have entrance counseling requirements, interestingly, private loans, which tend to have larger balances and higher interest rates, do not have any such requirement.  While HEOA includes new disclosure requirements and a self-certification process for private loans, there is no mention of entrance counseling.

I am reminded of the success that Barnard College had in counseling every student considering a private loan.  As CBS News reported, " 98 students were taking out private loans before the calls, afterward just 39 were -- a 60 percent decrease."  I recognize that most financial aid offices do not have the manpower to counsel each student considering a private loan, but a web-based counseling tool could create a scalable solution. 

Student lenders agree that they lose money when students default on loans, so why not provide an additional level of assurance that borrowers (and co-signers) understand their responsibilities when taking out a private loan?  While it would be great to put the onus on lenders to provide this tool, the pragmatist in me says that schools will need to take the lead on this idea.  Once schools are able to see that such a tool is effective at both decreasing private loan volumes and reducing default rate, its use will become widespread. 

So, what types of questions might be included with private loan entrance counseling? 

Here is just a sampling that I came up with on the fly (please provide me with any ideas for additional question in the Comments field below):

• True or False.  I have to demonstrate financial need in order to qualify for ANY federal loans (e.g., Stafford, PLUS, Grad PLUS).

• Prior to applying for this private loan, I/my parent(s) have taken out the following federal loans in these amounts:

• Perkins Loan
• Unsubsidized Stafford Loan
• Subsidized Stafford Loan
• Parent PLUS loan
• Grad PLUS (if graduate student) 

• True or False.  A private student loan is dischargeable in bankruptcy.

• Private student loans may include the following fees:
  • Origination fee
  • Repayment fee
  • Late payment fee
  • Non-sufficient funds fee
  • All of the above

• True or False.  Private student loans have a fixed interest rate that doesn't change over the life of the loan.

• Assuming an average interest rate of 11% and a 15 year payment term, for every $1.00 that I borrow, I can expect to pay back roughly:
  • $1.00
  • $2.00
  • $3.00
  • $4.00
  • More than $4.00

• Which of the features below may make a Parent PLUS loan more attractive than a private loan?
  • Interest rates generally lower than the average private loan
  • Less strenuous credit requirements
  • Fixed interest rate that does not change over the life of the loan
  • All of the above

• Choosing to repay interest on my loan while I am in school rather than waiting until I graduate, would save me (assumes $10,000 loan taken out in freshman year with 11% interest rate and 15 year repayment):
  • $0
  • $1,000
  • $2,500
  • $5,000

• True or False.  I can expect the interest rates on my private student loans to rise over the term of the loan since interest rates are now at historic lows in the United States.  

Isn't entrance counseling for private loans an idea whose time has come?   One lesson (and there are clearly many) of the subprime debacle we are suffering through is the importance of having informed and educated borrowers.  Isn't it worth it to go the extra mile to ensure students know all their options as well as all of the costs before taking on the burden of a private loan?

Please let me know your thoughts on this concept!

Update (December 3, 2008):  I received this email from Wells Fargo in response to this post: 

Wells Fargo saw the same need in the marketplace that you do.  In October, we introduced a piece that covers that topic (attached).  Our vision is to help our customers succeed financially, and we feel strongly about making the information available.

 

This piece has been very well received by the financial aid offices with which we do business--in fact, they have requested 5,000 copies in less than six weeks.  We are currently in the process of editing and reprinting as well as converting it into a presentation with a Q&A section that FAOs can use directly with their students. 

Here is the the file with the Wells Fargo Private Loan Counseling Booklet:  Download WF Private Loan Counseling booklet. 

Update (December 3, 2008):  Here is a thoughtful response that I received from Mike Flanagan from Video Symphony TV and Film School (feel free to offer your thoughts in the Comments section):

"Isn't it worth it to go the extra mile to ensure students know all their options as well as all of the costs before taking on the burden of a private loan?

AND

"Once schools are able to see that such a tool is effective at both decreasing private loan volumes and reducing default rate, its use will become widespread."

"Please let me know your thoughts on this concept!"

If Entrance Counseling serves to ensure that prospective students obtain all other lower-cost loans, then that's a great outcome and one that everyone is in favor of. My school always encourages and persuades students to take advantage of every federal student aid option available (which unfortunately is quite limited for most of our students).

However, if Entrance Counseling dissuades skittish, on-the-fence prospective students from taking out private loans and hence not enrolling, then neither those prospects nor society is served if they opt out of going to school and continue being unemployed, underemployed or painfully employed.

The reason schools see Entrance Counseling decreasing loan volumes and reducting default rates is most likely due to decreasing the number of students who enroll. So, of course, Entrance Counseling will reduce loan volumes and default rates along with enrollments. Most private loan borrowers borrow because they face a gap in their ability to pay for school: Their Savings + Federal Loans + Money Earned While in School < Tuition & Fees & Living Expenses.

Education is an investment. It creates an asset (increased earning power and career satisfaction) that usually exceeds the liability (debt) if the quality and marketability of the education is satisfactory. Discussing the costs (private loan debt) devoid of the benefits (more educated, better compensated workforce) misses the point that education is an investment. Unfortunately, in some states (e.g. California) many states make it illegal or unfeasible for schools (like mine) to intelligently discuss education as an investment with prospective students. State law precludes us from discussing with students the economic benefits (i.e. earnings potential) of a new career path. Until all aspects of Education as an Investment can be intelligently discussed, private loan entrance counseling's effectiveness will be a very mixed bag.

Respectfully,

Mike Flanagan

Update (December 17, 2008):  Here is a doctoral dissertation from Carol Jensen of the University of Nebraska that shows the inadequacies of the current approach (which appeared in NASFAA news today).  I will read over the holidays and provide a more complete synopsis of its findings. 

Comments

[collegeloanconsultant]

True or False. Federal law mandates that private lenders must offer the same deferment, forbearance, graduated repayment options as the federal government loans do.