The Student Loan "Total Deferment" Trap

WASHINGTON, April 21, 2005 - EduCap Inc., one of America’s leading providers of privately-funded higher education financing through its Loan to Learn® program, today issued a strongly worded statement raising serious concerns with the practice of "total deferment." Total deferment is especially harmful in private student loans because of the capitalization of interest accrued when students are in school. According to EduCap, this increasingly popular but highly dubious private student loan "benefit" has the potential to threaten thousands of unwary student borrowers and their families with undue hardship or outright financial ruin.

The key to the appeal of total deferment in the private student loan context is obvious enough - borrowers don’t need to make loan payments whatsoever while the student is enrolled in school. Enticed by a lender’s soothing prospect of being able to "relax and concentrate on your studies," many student-borrowers take this easy way out without a second thought. Similarly, families drowning in debt with more than one student in college at the same time will instinctively grasp at the immediate relief offered by total deferment in an effort to keep their economic heads above water. In both cases, the day of financial reckoning - often four years or more away - can seem comfortably distant.

In EduCap’s view, however, this unrealistically rosy scenario conceals a number of major financial risks. For example, total deferment can make a private loan thousands of dollars more expensive than it otherwise would have been. The reason is simple: in most cases, interest is continually accruing and being added to the principal balance of the loan during the deferment period. After four years of total deferment, borrowers are looking at principal balances that are significantly larger than their original loan amounts. They are caught in the age-old trap of paying interest on interest - in some cases for fifteen years or more. In addition, the massive monthly payments on total deferment loans are frequently far beyond the means of new college graduates. Too often, the result is missed payments, ruined credit, and long-held dreams that have to be deferred indefinitely, or even totally abandoned.

According to EduCap Chairman and CEO Catherine B. Reynolds, "The particularly unconscionable aspect of total deferment is that it’s aimed at the very borrowers who can least afford it." Reynolds is equally clear about the solution. "What they really need is not a temporary benefit that vanishes at the end of the deferment period, but a loan product that’s responsibly structured for the long haul - one that keeps their total costs down, while maintaining their monthly payments at a manageable level and helping them develop sound money management habits."

The type of higher education financing that meets these parameters is a "partial deferment" loan, which requires affordable payments of interest only while a student is in school. "EduCap offers partial deferment loans because they are in the best interests of America’s students and their families," says Reynolds. "They represent an economically sensible middle course that avoids the unrealistic extremes and dangerous financial traps of total deferment."

For more information on the hazards of total deferment, log onto www.loantolearn.com.

EduCap Inc., a Washington, D.C. non-profit organization, with a mission to promote an educated citizenry through its Loan to Learn program, pioneered the credit-based student loan industry by creating the very first nationwide privately-funded loan program. EduCap Inc. has disbursed billions of dollars in education loans to students and their families since its founding nearly 20 years ago.