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FastWeb conducted a student loan survey in October and November 2008 to help identify the reasons why some borrowers prefer private student loans over federal education loans. The survey was also intended to help measure the impact of the student loan credit crunch on prospective borrowers and to generate ideas for improving the student loan programs.

Summary of Key Results

Key findings of the student loan survey include:

• A high percentage of prospective borrowers of private student loans, Parent PLUS loans and home equity loans are being denied. Roughly half of the applicants for each type of loan are denied.

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• Nearly half of Stafford loan borrowers have borrowed the maximum amount available.
• More than a third of students use non-education debt to pay for school, such as borrowing from friends and family, credit cards or personal unsecured loans from a bank. Only 1.2% had used a peer-to-peer loan.
• One-sixth of students borrowed private student loans because they were ineligible for federal education loans. Most of these were because either the student or parent were not US citizens, with only 2.0% because the student was not making satisfactory academic progress.
• Half of parents were unwilling to borrow from the Parent PLUS loan program. About a quarter were unwilling to borrow because the parents already had too much debt.
• More than a quarter of parents were unwilling to complete the FAFSA. Many were unwilling because they didn't think they would qualify for financial aid. Others were unwilling because of concerns about privacy or they were undergoing a divorce or separation.
• The primary reasons why families borrowed private student loans included having reached the Stafford loan limits, being unaware of federal loan options, being ineligible for federal education loans, and parents unwilling to borrow for their children's education. Other key contributing factors include misconceptions about federal loans only being available to the poor, families relying on credit cards to pay tuition instead of education loans and the ease of applying for private student loans.

The survey also asked for suggestions for improvement in the federal education loan program. Some of the suggestions were focused on loan terms, such as increasing loan limits, cutting interest rates, eliminating interest capitalization and doubling the grace period before the start of repayment. Other suggestions were focused on the process, such as making the application forms simpler, easier to understand and easier to complete, and streamlining the disbursement of loan funds. They suggested having a live person (not the lender) handhold families through the process and felt that the federal education loan options should be publicized better. Students also called for having just one student loan instead of multiple. They also had suggestions for the financial aid application process, such as having the FAFSA consider consumer debt, not consider parent income and assets, use regional cost of living adjustments, and provide a way for families to explain extenuating circumstances. Some students called for expanding eligibility, such as allowing students whose parents refuse to complete the FAFSA to obtain student loans on their own, allowing students to borrow for a second bachelor's degree or allowing international students to borrow from the federal education loan programs. The students also called for increases in student aid funding, such as increasing the Pell Grant, replacing loans with grants, and providing more assistance to children of single parents. They also felt that talent should be rewarded, such as providing a full-ride for exceptionally talented students regardless of the financial situation at home and rewarding students for getting good grades in college.

Previous Data on Borrowing Patterns

According to data from the 2003-04 National Postsecondary Student Aid Study (NPSAS), 91.1% of undergraduate student private loan borrowers do not borrow from the PLUS loan program and 22.7% do not borrow from the Stafford loan program. (When restricted to undergraduate students at 4-year institutions, the figures are 89.9% and 19.7%, respectively. When restricted to undergraduate students at 2-year institutions, the figures are 95.1% and 31.8%.) 24.3% of graduate student private loan borrowers do not borrower from the Stafford loan program. These results are somewhat surprising, given that the federal education loans are cheaper, more available and have better repayment terms.

It is not entirely clear the extent to which these statistics are the result of eligibility restrictions as opposed to personal preferences. For example, a student might be ineligible for federal student loans because of a failure to achieve satisfactory academic progress (a minimum of a 2.0 GPA). Or the student's college may have opted out of the federal student loan programs to preserve eligibility for the Pell Grant program, since schools with high cohort default rates lose eligibility for both federal loans and grants. International students are also ineligible for federal student aid. The student may have borrowed the maximum available Stafford loan or his or her parents may have been denied a PLUS loan because of an adverse credit history.

Some of these questions can be answered by further analysis of 2003-04 NPSAS data. The following table shows the percentage of undergraduate private student loan borrowers who do not borrow from the Stafford or PLUS loan programs who have a given characteristic. These categories may overlap and do not total to 100%.

This table presents at best an incomplete picture of the reasons why some families borrow private student loans instead of federal education loans. The FastWeb Student Loan Survey was conducted in order to provide more insight into this phenomenon.

The FastWeb Student Loan Survey

The FastWeb Student Loan Survey was conducted from October 23, 2008 through November 13, 2008. The survey was mentioned in four regular FastWeb newsletters sent to 6,079,974 college students and 1,007,853 parents of college students. The survey was implemented using SurveyMoneky and was incentivized by a chance to win a free copy of FastWeb College Gold: The Step-by-Step Guide to Paying for College.

There were a total of 1,202 responses by the cutoff date, yielding a confidence interval of +/- 2.83% at the 95% confidence level for the US college student population as a whole.

20.9% of respondents attend a 1- or 2-year undergraduate program, 68.9% a 4-year undergraduate program, and 10.2% a graduate or professional degree program.

65.2% of respondents indicated that they were a dependent student, 21.9% an independent student, and 12.9% were unsure. (Dependency status was defined on the survey in terms of whether parental information was included on the FAFSA.)

The distribution of the marital status of dependent students' parents was as follows: 72.3% married, 13.7% divorced, 3.4% separated, 7.2% never married, 1.4% widowed, and 2.0% prefered to not respond. (None indicated that their parents were in a civil union.)

48.1% indicated that their parents were helping with college costs. 31.8% said that their parents were not helping with college costs, and 20.2% said "maybe / depends". Among dependent students the percentages were 65.5%, 12.6% and 21.9%, respectively. Among independent students the percentages were 6.3%, 86.8% and 6.9%, respectively.

Loan Application Statistics

The following table shows the percentage of students applying for each type of loan and of those applying, the percentage who were denied.

Of Stafford loan borrowers, 44.9% indicated that they had borrowed the maximum amount available. 34.2% indicated that they had not borrowed the maximum amount available, and 20.8% were not sure whether they had borrowed the maximum amount available or not.

36.0% of respondents indicated that they had used other forms of debt to pay for school. 16.7% of respondents said they had borrowed from friends and family, 13.9% using credit cards, and 10.2% using a personal loan from a bank. 3.1% used a fixed rate home equity loan, 1.2% used a variable rate home equity loan, and 3.1% used a variable rate home equity line of credit (HELOC). 1.2% said they had used a peer-to-peer loan. (Totals sum to more than 36.0% because some respondents may have used more than one other form of debt.)

Reasons for Borrowing Private Student Loans

Of those borrowing private loans, 16.8% indicated that this was because they were ineligible for federal education loans. 10.6% said that the student was ineligible because he or she was not a US citizen, 10.4% because the parents were not US citizens, and 2.0% because the student was not making satisfactory academic progress. (15.6% were ineligible because either or both the student and parent were not US citizens.) The unstructured responses included additional reasons, such as the parents being denied a PLUS loan because of an adverse credit history and and parents or student earning too much money.

Of those borrowing private loans whose parents were eligible to borrow from the Parent PLUS loan program, 50.4% said that their parents were willing to borrow for their education and 49.6% said that their parents were not. The most common reasons for parents being unwilling to borrow for their children's education included:

• Parents already have too much debt (23.1%)
• Student is an adult and should be responsible for own education (14.7%)
• Student feels that parents have done enough (10.7%)
• Prefer not to answer (9.7%)
• Hostile home environment (4.6%)

• Parents dead
• Parents have no income and would be unable to repay debt
• Parents are retired and on fixed income
• Parents applied and were denied (bad credit, bankruptcy)
• Parents want student to pay for (all of, part of) his/her education (to learn responsibility, to appreciate it more)
• Parents are under severe financial hardship due to the economy
• Parents are divorced and custodial parent cannot afford to repay debt
• Single parent is unable to afford to borrow
• Parents already have too much debt
• Independent student so parents are ineligible for PLUS loan

Of those borrowing private loans, 73.3% said that their parents were willing to complete the FAFSA and 26.7% were not. The primary reasons some parents were unwilling to complete the FAFSA included the following:

• Didn't think would qualify (13.1%)
• Prefer not to answer (11.2%)
• Privacy concerns (3.4%)
• Undergoing divorce or separation (2.6%)

• Parents completed FAFSA but were denied
• Student is an independent student
• Parents are not US citizens
• Parents are diabled
• Parents are senior citizens on fixed income

In addition, the survey included two "comprehensive" questions concerning the reasons why families borrowed private loans instead of federal loans. Both questions had the same responses, but the first allowed them to check all the reasons that applied, while the second required them to choose only a single primary reason.

The responses to the first question were as follows:

• Maxed out Stafford loan limit (27.2%)
• Unaware of federal loan options (24.7%)
• Not poor (15.0%)
• Using credit cards to pay tuition (13.9%)
• Loan was recommended by school (12.9%)
• Online application form (12.5%)
• Cost (lower interest rates and fees) (11.1%)
• Independent undergraduate student and so ineligible for PLUS loans (10.1%)
• Loan was recommended by friend, relative, colleague, neighbor (8.7%)
• Quick eligibility decision (7.3%)
• Prefer private loans because student is the primary or only borrower (7.0%)
• College voluntarily did not participate in federal loan programs (5.6%)
• Philosophically or religiously opposed to debt (5.2%)
• College was ineligible for federal loans (4.9%)
• Less paperwork (4.5%)
• Saw advertisements (TV, Radio) before became aware of other options (4.5%)
• Familiar with lender name (3.5%)
• Did not appreciate the difference in cost and other terms of federal vs private loans (3.5%)
• Saw low advertised rate in advertisement (2.4%)

• Needed private loan for expenses beyond cost of attendance, such as living expenses for family
• Do not understand the difference between federal and private loans
• Ineligible for federal education loans (e.g., citizenship)
• Parents ineligible for PLUS loan due to credit history
• One cannot use federal loans to pay for previous year's college costs
• Didn't qualify for the no interest loans (presumably subsidized loans)
• Did not have all the required documents for federal loans

The responses to the second question were as follows:

• Maxed out Stafford loan limit (19.5%)
• Unaware of federal loan options (13.7%)
• Ineligible for federal education loans (8.2%)
• Parents unwilling to borrow for children's education (8.2%)
• Loan was recommended by school (7.2%)
• Not poor (6.5%)
• Cost (lower interest rates and fees) (6.2%)
• Independent undergraduate student and so ineligible for PLUS loans (4.5%)
• Using credit cards to pay tuition (4.1%)
• Quick eligibility decision (3.4%)
• Prefer private loans because student is the primary or only borrower (3.1%)
• Loan was recommended by friend, relative, colleague, neighbor (2.7%)
• Philosophically or religiously opposed to debt (2.4%)
• Online application form (2.4%)
• College voluntarily did not participate in federal loan programs (2.4%)
• College was ineligible for federal loans (1.7%)
• Parents unwilling to complete the FAFSA (1.4%)
• Saw low advertised rate in advertisement (0.7%)
• Less paperwork (0.7%)
• Familiar with lender name (0.3%)
• Saw advertisements (TV, Radio) before became aware of other options (0.3%)
• Did not appreciate the difference in cost and other terms of federal vs private loans (0.3%)

Suggestions for Improvements in Federal Education Loans

The survey also asked respondents "What changes would you make in the federal loan programs?". Some of the more interesting responses included the following:

• Make the application forms and process easier to understand, easier to complete, more user-friendly, more efficient, less paperwork, less complicated, simpler.
• Increase loan limits. Some respondents suggested allowing students to borrow full cost of attendance instead of their parents. Some respondents asked for loan limits that are high enough to eliminate the need for private student loans.
• Increase grace period to 12 months.
• Stop basing financial aid on parent income and assets. Unfair to use our tax money to provide financial aid to lower income students.
• Lower interest rates.
• Eliminate interest.
• Replace loans with grants.
• Increase grant funding.
• Provide a full ride for exceptionally talented students regardless of financial situation at home.
• Reward students for good grades in college.
• Quicker loan disbursement. (Presumably a reference to the delayed disbursement issues affecting some FFELP lenders.)
• Provide one single loan for the complete education instead of multiple loans (e.g., one loan instead of Perkins, subsidized Stafford, unsubsidized Stafford and PLUS)
• Publicize federal loan availability better.
• Change FAFSA to consider consumer debt.
• More assistance for children of single parents.
• Have a live person (not the lender) help parents/students understand the process.
• Charge same amounts to in-state and out-of-state students.
• Allow international students to borrow.
• Add questions to the FAFSA to help identify possible professional judgment cases. "The applications are too black and white and don't take into consideration other circumstances." "The FAFSA needs to allow parents to explain extenuating circumstances. It's black and white with no room to explain."
• Use regional cost-of-living adjustments.
• Ban capitalization of interest.
• Replace the back-end public service loan forgiveness with up-front loan forgiveness (e.g., forgive a percentage or dollar amount of loans for each year of public service)
• Use same definition of dependent as on the income tax returns.
• Allow students whose parents refuse to file FAFSA to borrow for their education on their own, without parents. Don't base the loan eligibility on parents income and assets.
• Base financial aid on take-home pay instead of gross income.
• Make it easier for the student to have access to funds.
• "Applications should not include racial makeup and all races should be treated equal. It shouldn't depend which ethnic background a person belongs to."
• Allow borrowing for a second bachelor's degree.
• Simplify the process for non-traditional (older) students.
• Spend the $700 billion rescue package on student aid instead of bailing out CEOs of financial institutions.

Financial Aid Application Rates

46.1% of respondents said that they had filed the Free Application for Federal Student Aid (FAFSA) for the 2008-09 academic year. 48.1% did not, and 5.9% were not sure.

Of those that did not file the FAFSA, the following were the primary reasons:

• Didn't think would qualify (59.3%)
• Not a US citizen or national (25.8%)
• Form too long and confusing (11.3%)
• No need for federal aid (10.8%)
• Concerns about privacy (5.2%)

• Haven't had the time to complete it yet
• Planning on filing it soon
• Don't have all the required documents
• Parents or student have not yet filed income tax returns
• In default on previous loan
• Previously applied for and was denied
• Unaware of FAFSA
• Made decision to retun to school recently
• Ex-spouse's responsibility and he/she hasn't done it yet

Potential Biases

Since FastWeb is a free scholarship matching service, there is the potential for selection bias (i.e., students who are looking for scholarships). Another potential source of bias is the requirement that the students have opted in to receive newsletters. Also, the students and parents self-selected based on their interest in completing a "student loan survey". But the newsletters were sent to more than 6 million college students, representing about a third of all college students in the US.