By Kelly Rosinger
As college students across the country prepare to pay tuition bills, higher education leaders, policymakers, and researchers are faced with the important question of what they can do to help students make informed borrowing decisions.
The answer is not easy. College borrowing decisions are complex: each year, students have to decide whether to borrow, how much to borrow, what loans to take out among various options offered by the federal government and private loans, and how much to borrow from each source. Adding to this complexity is the fact that financial aid award letters, which are how colleges communicate information about loan options to students, are often difficult for students and their families to understand and do not always clearly distinguish between grant aid and loans. Differences in the information that different colleges provide to students in financial aid award letters can make it difficult to compare costs and borrowing options for those considering more than one college.
The consequences of borrowing decisions are large and long lasting. Outstanding student debt in the United States tops $1.3 trillion, and the average student borrower takes out $28,000 in loans. Loans, particularly federal student loans, play an important role in supporting college access and persistence toward a degree, but nearly one in 10 borrowers default on their student loans. Students who borrow but do not graduate are at particular risk of defaulting. Many students with debt but no degree borrow relatively little—often less than $5,000—yet one in three struggle to repay loans because they do not receive the earnings bump associated with a college degree.
Surprisingly, recent surveys demonstrate that many college students do not know whether they have borrowed or how much debt they have accrued during college. In fact, half of first-year students underestimate how much they have borrowed. Additionally, many students do not maximize borrowing from federal student loans before turning to private loans, which tend to carry higher interest rates and offer fewer protections for borrowers.
So what can we do to help students make informed borrowing decisions? A number of colleges in recent years have implemented low-cost interventions designed to facilitate active and informed borrowing decisions as students evaluate financial aid award letters. For example:
- At Montana State University, letters with information about loan balances and offers of financial counseling sent to students at risk of default (based upon high loan balances and academic major) led to modest reductions in borrowing and improved academic outcomes.
- Personalized letters sent to students at a flagship public university in the Midwest outlining cumulative debt, future monthly payments, and borrowing relative to peers reduced borrowing among students with lower GPAs and increased contact with financial aid counselors.
- A statewide initiative in Indiana requiring postsecondary institutions that participate in federal student aid programs to send students letters with information about cumulative borrowing and future monthly payments appears to have reduced reliance on loans. U.S. Rep. Luke Messer (R-IN) has introduced the Letter of Estimated Annual Debt for Students (LEADS) Act that would make the statewide initiative a federal requirement.
- A month-long text message campaign at the Community College of Baltimore County providing information about loans and connecting students with a financial aid counselor led to reductions in unsubsidized loan borrowing.
- Evidence from several community colleges demonstrates that students have a tendency to default to the amount that is listed in the loan offer.
In addition to the work colleges are doing, the federal government has also taken steps to help students make informed borrowing decisions.
In 2012, the Obama administration announced the financial aid shopping sheet, a one-page letter that colleges can send to students as a supplement to their financial aid award that aims to simplify and clarify information about college costs, borrowing options and student outcomes (e.g., graduation rates, loan default rates and median borrowing). Created by the Consumer Financial Protection Bureau and the Department of Education as part of a larger effort to improve consumer information, the shopping sheet is currently used by more than 3,000 postsecondary institutions, many of which direct the letter to students receiving federal military and veteran educational benefits. An evaluation of the shopping sheet offers some preliminary evidence that it has resulted in a modest decrease in borrowing at colleges with low graduation rates.
Interventions like the ones outlined above may be particularly important for some student populations for whom borrowing decisions are especially complex or for whom the consequences of student debt are particularly important, such as low-income and minority students. For these students, debt burdens are particularly high. According to a 2016 report from the Brookings Institution, black college graduates . Interventions aimed at promoting active and informed borrowing decisions among underrepresented student populations at particular risk may help students find a balance between borrowing enough to persist toward a degree but not so much that they struggle to repay loans or pursue graduate education upon leaving college.
The impact of such efforts on academic and long-term loan repayment outcomes are less clear, in part because the interventions in this area are relatively recent and a full investigation of long-term outcomes, such as persistence, graduation, and loan repayment is not yet possible. Nonetheless, a growing body of evidence indicates that low-cost, scalable interventions delivered to students as they evaluate loan options can influence borrowing decisions.
The next step is for college leaders and researchers to work together to continue to develop and evaluate strategies aimed at helping students make informed borrowing decisions. With continued efforts and leadership-research partnerships, we can help students navigate these critical decisions and improve outcomes for both students and institutions.