Lowering student debt burden could be as simple as telling students how much they’re borrowing. Conventional wisdom that students understand what they’re agreeing to when accepting federal largesse, for a significant portion of students, is wrong.
When Indiana University started sending letters to students in 2012 that estimated their loan debt and payments, borrowing fell by 18 percent, according to Route Fifty.
State legislators caught on. Indiana now requires colleges to send reminder letters, and Nebraska has copied the Hoosiers.
“Giving them more information about their debt may help change their borrowing habits. Research suggests that students say no to loans when they’re told how much they’re borrowing and how loans could weigh on them in the future,” Sophie Quinton wrote.
Students might have a theoretical understanding that they’re accepting loans that must be repaid, but when reality hits via a simple letter, they change their behavior.
The effectiveness of the letters, though, could be a fluke. The letters improve financial transparency, but it won’t be clear whether they change behavior until more colleges follow suit. It could also scare away students from attending college who would otherwise succeed. Borrowing for college is unwise when a graduate can’t repay the loans, but it’s a smart investment when they find a good job. Showing the costs without the benefits could drive away students.
However, that seems like a risk worth taking. Students are ignorant of basic knowledge about their loans. “Just 6 percent of them knew how long they would be repaying the debt. Only 8 percent knew the interest rate on their loan,” Natalie Kitroeff wrote for Bloomberg.
It’s a pervasive problem.
“For many students, ignorance about the national debt burden may mirror a more personal oversight: People do not have any idea how much they owe,” Kitroeff noted.
For the cynical, the student loan program looks like a conspiracy by colleges to fleece taxpayers and load students with debt. For the optimistic, it means that student debt can be dramatically reduced with education and financial literacy classes. If the government won’t turn off the faucet of easy loans, then asking colleges to inform students of what they owe and how they’ll pay for it could save them from penury.
