How about educating the student before the loan?
Higher education and transparency in lending are critical to understanding the opportunities and risks of borrowing money.
As more young adults seek financing for college, the risks to borrowing money need to be communicated and reinforced through tangible repayment details.
About one in five federal student loans were in default or serious delinquency by 2017, according to data from the Federal Reserve. Greater than half of borrowers who are at least 31 days delinquent never completed their program. And borrowers who leave school without a credential are more than twice as likely to be delinquent. Among those federal student loans in default, 65% are for principal amounts below $10,000.
A recent study by college testing company, ACT, found that “despite efforts to increase financial aid literacy, there remains an urgent need for more financial literacy-specific interventions.” ACT’s findings were consistent with a recent survey by College Ave Student Loans that found nearly 70% of students did not know what the monthly amount due on their first student loan bill.
There are a number of common-sense, bipartisan bills before Congress that aim to help students understand the terms and implications of the federal debt they incur. This is an important issue to address as roughly 90% of student debt is issued by the federal government.
Most recently, 37 House Republicans and Democrats have sponsored the Student Loan Disclosure Transparency Act, which would require notification to students — before they take out a federal loan and every month thereafter — the amount of debt accumulated each year, the monthly payments, repayment options, the number of years for repayment and how much they will owe in total. The terms disclosed would be simple, easy to understand and delivered every month. Currently, students often do not receive information regarding repayment until after they have left school.
A similar bill has been introduced in the Senate with bipartisan support.
Various studies reinforce the value of a college degree and graduates also consistently experience significantly lower rates of unemployment. According to the College Board’s Education Pays 2016 report the median annual earnings of full-time workers with bachelor’s degrees was 67% higher than those with only high school diplomas.
Students need to be informed about the implications of borrowing money for college so they can make educated decisions. They need to understand the burdens of borrowing: how much they will owe, how long it will take to repay and what will be the monthly obligation.
Students also deserve to understand that they are borrowing, not just to attend college but to earn a degree. They will have to repay the debt even if they leave without the degree.
Yet, it is the degree that typically delivers the higher-paying job that facilitates debt repayment. This nuance — borrowing to invest in a degree, not to attend college — is seldom emphasized.
The bipartisan proposals before Congress are reasonable measures to improve financial literacy and provide the transparency that students need in order to make responsible decisions. The decision to finance a degree can have long term consequences for students, taxpayers and banks.