Today, most families will have to finance a larger part of their college education through various student loan programs. Currently, student loan borrowers total approximately 43 million Americans with debt exceeding 1.3 trillion dollars. Colleges have entrance and exit loan counseling for all students who receive federal loans. Some colleges have also gone the extra step of adding financial literacy programs on campus to address this growing problem. The goal of the counseling is to ensure that the students understand their borrowing responsibility.
There is an interesting concept being discussed called Financial Abstraction. Financial Abstraction is the lack of knowing what things really cost. As an example, do your keep track of your EZ Pass each time it is used? Now think of your child. Do they understand there is a charge for EZ Pass or do they think it is just another express lane on the highway? For many students and families, the same is true with college tuition. Do college student and their parents really understand how fast college loan debt accumulates?
Earlier this year, I read an interesting article titled, “What Happens When you Warn Students about Their Loan Debt?” The author, Sophie Quinton, discusses the question if student debt can be lowered by simply sending students a letter updating them on their current debt. The author gives the history of Indiana University (IU) and how in 2012 they began a program to educate their students about their current student loan debt and specifically understanding what their debt would be like after graduation. This was accomplished by IU sending annual letters to every student. The letters included estimates of the student’s current total debt and future monthly payments.
This simple letter changed the financial behavior of many students and families in a very positive way.
According to the July 14, 2016 press release by Congressman Luke Messer, the letters have helped with financial literacy and the loan crisis. In his press release, he states that after four years, the IU undergraduate student loan borrowing dropped 18 percent. Following IU lead, Indiana enacted a legislation in 2015 that required all colleges that accept state aid to send out similar letters. In the spring of 2015, Wisconsin and Nebraska followed with similar laws.
Interestingly, the state of Indiana has gone a step farther. In July, 2016 Congressman Messer introduced the bipartisan legislation, (LEADS) or the Letter of Estimated Annual Debt for Students. The goal of the bill is to help with the current student loan crisis. Providing the college loan borrowers with clear picture of their student loans it will hopefully prevent students from over-borrowing. Click this link to read the three step goal of the LEADS Act proposed by Congressman Messer. As of this date, it has not been passed but I am encouraged that this will be a good step toward informing college students and their parents. Many of us get focused on one goal and overlook some other issues along the ways. This simple reminder may help to keep student borrowing in check and result in better decisions.
Academic Performance and Borrowing Behavior Research
In addition, I also wanted to talk about whether informing the student about their loans had any effect on the college student’s behavior for both academics and borrowing. As you know, the best way to save money when paying for college is to graduate in four years. This means students starting in freshman year need to have a better understanding of both their academic performance and credit hours and how they relate to a four-year graduation. In my readings, I also came across a research paper written by Maximilian Schmeiser, Christiana Stoddard, and Carly Urban. Their paper gives the results of their experiment in which certain students with student loans received “Know Your Debt” letters. Along with the letter the students were given incentivized offers for one-on-one financial counseling. For this experiment, the research team used a test group from Montana State University and University of Montana.
The research team garnered data that supported the concept that providing a student with an annual letter and counseling did conclude with the students borrowing less in the next semester. It also had the added benefit of the students taking more credits and having higher GPAs after receiving this hopefully information. Unfortunately, the program was not put into place after the experiment.
Informing Student Borrowers
In our continual effort to inform students about college affordability and student debt, College Affordability LLC has developed the second part of our EFC PLUS software for the In-College students. As you can see by the two previous examples, having some basic knowledge of your student loans helps with better debt management.
The current tools available for families to project total cost and debt are difficult to find. The EFC PLUS In-College loan repayment software helps the student envision their total student loan debt and the various loan repayment options in one place.
Don’t wait until spring of your senior year in college to understand your student loan debt. Start now! From both the research at Indiana University and the Schmeiser, Stoddard, and Urban study, it is evident that giving students the right information can help students stay on track academically and make better student loan decisions.
Do your research and understand the amount of college loans you will need to borrow to supplement the cost of college. The government has great information on both the college process and student loans. Go to government website Studentaid.ed.gov to help you get clarity on college issues. Your federal loan information is available on the National Student Loan Data System (NSLDS.ed.gov). EFC PLUS can also help you. Our website and software contains great information to help student loan borrowers make more informed decisions.