Tuition rises, loan limits idle

The student loan market is getting harder to navigate, thanks in part to the decision by some lenders to get out of the student loan business in addition to the growth of the alternative loan market.

Alternative loans (sometimes referred to as private loans) have risen in popularity in the last seven years and often come into play when there is a gap between educational costs and traditional financial aid.

The cost of tuition nationwide has increased 30 percent in the last five years, according to the American Association of State Colleges and Universities.

The limit for freshmen borrowing via federally funded loans, however, is about the same as in the 1980s, according to Connie Williams, director of student financial aid at the University of Cincinnati.

"The lending industry saw a market there," Williams said. "We do have students who have larger loans, especially in their senior year when they've used all their federal grants."

Students also turn to alternative lending if they've lost eligibility for federal loans. Failing to meet academic progress requirements and expiring time limits may cause students to lose eligibility.

Lenders dealing in alternative loans currently issue about $17 billion in loans annually, as compared to $1.5 billion just 10 years ago, according to the College Board.

Approximately 2,200 UC students currently have alternative loans totaling about $22 million, Williams confirmed, and federally-backed loans totaled about $58 million for the current academic year.

In addition to that sum, UC issues more than $93 million in institutional aid, including academic and athletic scholarships, graduate tuition assistance and tuition remission, Williams said.

While there is a risk of default for the lenders who issue alternative loans - students often have little or no work or credit history - there is also risk, in the form of high interest rates, to students.

While Stafford and other federally guaranteed loans (the federal government guarantees payment in the case of student default) come with interest rates that are capped at 9 percent and generally run between 5 percent and 8.5 percent, alternative loans carry interest rates that average more than 11 percent and also have origination fees of up to 4.5 percent, according to a report recently released by the National Consumer Law Center.

And now, some lenders of federally guaranteed loans are exiting the market because of funding shortfalls.

Williams said she wants to reassure UC students that this will not be an issue for them.

"There will be funds available for those students," she said. "A few lenders we use have gotten out of the student loan business but other lenders will make up the difference."

Williams also said she thinks there is some relief on the way for what many are calling a crisis.

"The federal government did increase loan limits a little bit this year and there's legislation to bring greater relief," she said.

"So I hope some good will come out of it."