Hard-up students turn to bank loans

The high cost of loans to repay tuition fees may be discouraging increasing numbers of Americans from attending the university of their choice, according to a report.

The study, by the non-partisan Institute for Higher Education Policy, found that private borrowing from commercial banks by university students has more than quadrupled in the past six years to about $5 billion (£3.08 billion), making it the fastest-growing form of student aid.

The institute's study says that students are turning to commercial banks for loans because many have already borrowed the maximum available to them under government-subsidised loan programmes, which have failed to keep pace with escalating tuition fees.

The study found that three-quarters of professional school students and half of undergraduates who took out private loans had already "maxed out" on their eligibility for government loans.

The number of private loan products grew by 244 per cent between 1997 and 2003, increasing from 79 to 2. Some private loan products have competitive interest rates or other terms and conditions that allow them to compete favourably with federal student loans.

The study says that the prospect of huge debt may be discouraging some students from attending university or from attending their institution of choice.

"Private loans play a pivotal role in the decision-making of many students and families," said Jamie Merisotis, the institute's president. She urged policy-makers to consider this trend as they discussed the continuing rise in higher education costs.

Private loans are also increasingly being used to pay for professional programmes such as law and medicine.

Though private loans make up only a small portion of the total student loan volume, they may be contributing to unmanageable debt, which can amount to more than $138,500 for students in professional programmes.

"Federal student aid - the main source of assistance to students - is much less effective than it used to be in promoting choice," the study says.