New Approaches Aim to Help Students Understand Debt, Manage Loans
Posted By Candace Talmadge on October 17, 2016 at 4:21 pm
Editor’s note: GoodCall writer Candace Talmadge continues her ongoing look at how well college students understand their student loans. In Part 1, she tracked the situations of three college students struggling with their debt. Part 2 looked at the effectiveness of college loan counseling. Today, she examines some alternative forms of counseling.
Significant numbers of college students still don’t grasp the consequences of large college loans. Consider this: 36 percent of millennial college graduates with student debt said they would not have attended college had they realized how much it was going to cost them, according to a Citizens Bank survey conducted early this year.
The reason is simple. “Eighteen-year-olds are not thinking five years down the road and what that looks like,” says Phil Schuman, director of financial literacy at Indiana University.
Tacitly acknowledging the issues with current loan counseling regulations, the U.S. Department of Education in August asked higher education institutions to join an experimental initiative aimed at improving student loan counseling.
IU is one of the higher education institutions and research organizations not waiting on the federal government. Instead, IU in 2012 launched a program to make financial aid more transparent and to educate all students about the consequences of their loans and how to manage their debt and finances.
According to Schuman, the program has reduced student borrowing levels by $98.7 million, or 15 percent, over the past four years. Every student entering the university receives a debt letter that outlines the student’s individual monthly payment after graduation based on that student’s level of borrowing.
“There’s been a good response to the debt letter,” Schuman says. He adds that such debt letters are now required by state law for any aid granting institution in Indiana, Nebraska, and Wisconsin.
An eye-opening look at student debt
Andrew Coen is 21-year-old senior at IU who is majoring in finance and technology management. That would seem to have given him a leg up on most students when it comes to understanding student loans. But, Coen says, his own debt letter was “eye opening.” In particular, he says, “I was not aware of how much interest was going to cost me.”
Now he passes that knowledge on to others. In 2015, Coen became a member of IU’s MoneySmarts team. This part of the university’s financial education effort uses students’ peers to advise them about their overall finances. Coen provides individual counseling on topics like credit cards, budgeting and making grant money last the entire semester and makes presentations with IU staff.
He says one of the biggest ideas taught in MoneySmarts is for students to live frugally to keep their debt as low as possible. For example, by not bringing their cars to campus, they avoid adding the associated expenses to their college living costs.
An online university joins the fight
Between 2013 and this year, the entirely online Western Governors University has managed to reduce the yearly amount its students borrow from $7,870 to $4,640, according to Robert Collins, WGU’s vice president of financial aid. Total student debt has dropped 41 percent.
Every year, all WGU students, most of whom are working adults, receive a letter that clearly outlines their expenses and the amount of financial aid they are eligible to receive. But, as Collins points out, just because a person qualifies for a certain loan amount does not mean the person should borrow the full amount.
“We encourage you to borrow as little as possible,” a sample WGU letter states. It goes on to break down unmet direct costs and suggest an amount to borrow. “Two-thirds of our students accept their recommendations,” Collins says.
In 2017, WGU plans to introduce an interactive online loan scenario calculator. Students will be able to plug in varying amounts of their loans for WGU and any college loans they already have and instantly see what their total monthly payment will be after they graduate.
Doling out proceeds in smaller amounts
College loans and grants typically fund students’ tuition and book fees upfront, and any remaining money is paid to student borrowers in a lump sum. Since 2010, MDRC, a nonprofit higher education and social policy think tank, has been testing a program called aid-like-a-paycheck or ALAP.
The program disburses existing aid from loans and grants in biweekly payments over a semester instead of in one or two lump sums. According to Evan Weissman, MDRC’s program director for ALAP, the thinking is that an ongoing payment approach better supports the monthly living expenses of the low-income students for whom it is designed primarily. “We’re looking for ways to improve the college aid system without additional funding,” he explains.
At present, MDRC is conducting a controlled study at Houston Community College and San Jacinto College, also in Houston. The schools have randomly chosen groups of students to receive ALAP while the rest are on the normal disbursement schedule. The study began in 2014 and Weissman said MDRC will issue a preliminary report on the findings in 2017. These colleges are not linking ALAP to any other loan or financial education efforts for students.
He also said that West Hills College in Coalinga, CA, this semester put all of its students on ALAP payments, and it does plan to connect its ALAP program to broader financial education for its students.
Collins advocates teaching students about debt well before they enter college. “It’s too late after they have borrowed money, he says. “You must get to students before they borrow.”