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Private lenders offering more student loans

Private lenders are offering more loans to college students at institutions such as Boston University due to an upswing in the economy, according to a Wall Street Journal article published Monday.

The seven largest private loaners in American allocated almost $6.9 billion to students last year, an 8.1 percent increase from the year before, according to a study conducted for the WSJ by MeasureOne.

Many Boston University students said private loans are a necessary addition to financial aid and federal loan packages.
Madeline Beach, a College of Arts and Sciences senior, said she took out loans from Sallie Mae.

“I chose this option simply because I didn’t have many other choices,” she said. “I was able to get some grant money and loans from BU, but I was still short by several thousand dollars.”

Beach said the loan was often accompanied by a higher interest rate than traditional federal loans.

“For me, it [Sallie Mae] hasn’t been the best option,” she said. “One year the interest rate was above 10 percent.”

Barton Lipman, professor and chair of the economics department in CAS, said private loans tend to cost more due to their high interest rates.

Federal loans contain provisions that are intended to guarantee students’ debts are repaid, which allows sources of funding to lend at a lower interest rate, Lipman said.

“It’s harder to get out of paying [federal] loans by declaring bankruptcy,” he said. “The banks know you’re on the line, so even if your credit is not very good, because there’s just no way to get out of it, they’re still going to make the loan.”

By contrast, banks are more likely to deny private loans due to the greater risk involved, he said.

“If your credit’s not good, they’re nervous, so it gets to be very difficult,” Lipman said.

Johannes Schmieder, an assistant professor of economics in CAS, said there were other benefits to taking out federal loans.

“A potential advantage of federal loans is that they offer various options for reducing loan payments during times of low income,” he said.

Some federal loans allow students to defer payments without accumulating interest while in school, Schmeider said.

Families with low disposable incomes can select a repayment plan with minimal required payments, he said.

Some students said private loans have potential benefits as well.

Matthew Solomon, a junior in BU’s School of Management, said he receives private loans from the New England Federal Credit Union.

“I think choice is the biggest reason why people [take out private loans],” Solomon said. “You can pick how you want to pay for it, how you want to refinance it.”

Solomon also cited enhanced customer service as an advantage of private loans.

“[With federal loans], it’s very hard to get in contact with somebody,” he said. “With a private institution, you’re paying a bit more to get that culture and that atmosphere where you can just walk in to ask a question.”

Private loans also allow students to cosign with another individual. Solomon’s federal loans, for example, are in his name, whereas his parents are helping to pay for his private loans.

Natalie Rivera, a senior in CAS, takes out private loans from Sallie Mae, as did her older siblings.

“They have conditions for the deferment of payments,” she said. “If they know I’m going to graduate school or law school within the next 18 months then they’ll defer the payment.”

Rivera said Sallie Mae has become more lenient on collecting repayments since the recession of 2008.

“What I experienced with my older siblings was that they were a bit more strict asking for repayments,” she said.

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