While student loan borrowing for college has been on the rise for years — total outstanding college student loan debt eclipsed credit card debt for the first time last year on its way to surpassing $1 trillion — another kind of student loan borrowing has been increasing under the radar: pre-college student loans for private K–12 education.
It used to be that families didn’t take out education loans until their children went off to college, but pre-college loans are becoming more popular as parents struggle to cover tuition costs for children enrolled in private elementary and secondary schools, from kindergarten to 12th grade. Data is scarce, but private school experts and lenders of pre-college loans are reporting an undeniable increase in borrowing. Your Tuition Solution, one of the largest lenders in the pre-college space, for example, reported a 10 percent increase in lending in March compared to a year ago and said, at that pace, the company estimated its total loan volume to rise to $20 million for the 2012–2013 academic year. First Marblehead, which exited the pre-college loan market in 2008, reentered the space last year when demand began to rise.
Private K–12 schools are offering their own student loans as well. At the Blake School in Hopkins, Minn., for example, 132 of its families signed up for the 10-month, 8.5 percent fixed-rate payment plan this year, an increase of 19 percent from last year. Meanwhile, the Hawken School in Chesterland, Ohio, offers a small number of student loans with a 6 percent rate.
“These loans aren’t as taboo as they once were — there are a lot more schools that are much more willing now to present a loan program as an affordability option,” says Kristen Power, northeast regional director for the National Association of Independent Schools’ School and Student Services, which processes families’ financial aid applications to private schools (“Student Loans on Rise — for Kindergarten,” SmartMoney, March 28, 2012).
The rise in pre-college private school loans — much of which is coming from high-income families, which represent a more than tree-fold increase in pre-college borrowing since 2003–03 — coincides with an increase in tuition. Total private school enrollment is down 11 percent from 2007, to 5.3 million, but the average annual cost of private school is about $22,000, up nearly 4 percent from a year ago and 26 percent from 2006–07.
Even though private schools have enlarged their financial aid budgets, pre-college lending has increased to cover the growing gap between free aid and tuition costs, but not without consequences. About one in six parents of college graduates already owes an average of nearly $34,000 in education loans. Ultimately, experts warn that pre-college borrowing is risky for parents, who may be facing a situation in which they have to make payments on pre-college and college loans at the same time.