college loan

Helping Families Finance College: Improved Student Loan Disclosures and Counseling A Report By: Consumers Union Supported By: The Pew Charitable Trusts July 2007 Acknowledgements The primary author of this report is Michael Wroblewski, Project Director Consumer Education and Outreach at Consumers Union. In addition, many members of Consumers Union’s staff provided editorial support and advice, including Chuck Bell, Ellen Bloom, Luke Bogart, Sambhavi Cheemalapati, Gail Hillebrand, Jeannine Kenney, and Brenda Praga. The author also would like to give heartfelt thanks to Elena Falcone and Betsy Imholz for their strategic guidance and editorial support. The author also would like to thank those who contributed advice, editorial support, and technical guidance, including Lauren Asher, Edie Irons, and Robert Shireman of The Institute of College Access and Success (TICAS); Tobi Walker and Pauline Abernathy of The Pew Charitable Trusts; Deanne Loonin, Lauren Saunders, and Margot Saunders of the National Consumer Law Center; Sean Callaway, Pace University; Kim Clark, U.S. News and World Report; Allison Cohen, PeopleTalk; Nancy Coolidge, The University of California; Tally Hart, Ohio State University; Mark Kantrowitz, Publisher, FinAid.org; and Lewis Mandell, SUNY Buffalo School of Management. Consumers Union also would like to thank The Pew Charitable Trusts for the funding of this project. The Pew Charitable Trusts (www.pewtrusts.org) serves the public interest by providing information, advancing policy solutions, and supporting civic life. Consumers Union (CU) is an expert, independent, nonprofit organization, whose mission is to work for a fair, just, and safe marketplace for all consumers. CU publishes Consumer Reports and ConsumerReports.org in addition to two newsletters, Consumer Reports on Health and Consumer Reports Money Adviser. Since its founding in 1936, Consumers Union has derived its income solely from the sale of these and other publications and services, and from noncommercial contributions, grants, and fees. Consumers Union's publications carry no advertising and receive no commercial support. CU’s Consumer Education and Outreach program works to deliver effective consumer education in two ways: by raising consumer understanding and by reducing the complexity of information needed to make marketplace decisions. Our approach operates through intermediaries that directly serve consumers, both on the powerful “supply-side” and the targeted “demand-side” of the marketplace. The author is responsible for any factual errors. The views expressed in this report do not necessarily reflect the views of those who provided editorial review. i Table of Contents Executive Summary ..................................................................... iii Summary of Recommendations................................................... v Introduction ................................................................................... 1 Methodology .................................................................................. 2 Summary of Learning from Students and Parents Who Have Navigated the Student Loan Process .......................................... 3 1. Cost of Higher Education ..............................................................................3 2. General Information Sources on How to Pay for College .............................4 3. Specific Information Sources about Student Loans......................................6 A. Mandatory Federal Student Loan Counseling ........................................7 B. The College Financial Aid Office.............................................................8 C. Preferred Lending Lists ...........................................................................9 4. Funding Sources Used .................................................................................9 5. Understanding Repayment Obligations ......................................................10 Implications and Recommendations ......................................... 12 Recommendation 1: Emphasize early and often the comparative costs of different college funding sources and the need to shop around for federal and private student loans. ........................................................................ 12 Recommendation 2: Standardize key components of the college financial aid award letter. .............................................................................................. 14 Recommendation 3: Provide borrowers plain English disclosure of rates and terms about private educational loans when the borrower receives loan approval. ................................................................................................... 18 Recommendation 4: Require student loan borrowers to participate in annual online financial literacy counseling prior to loan disbursements. ............. 21 Recommendation 5: Develop college-specific loan profiles that accurately describe the student loans that students and parents have borrowed to attend each college. ................................................................................. 22 Recommendation 6: Report the rates and terms of private educational loans made to students by colleges to the U.S. Department of Education........ 23 Recommendation 7: Improve the National Student Loan Data System (NSLDS) Student Access and Student Aid Report to provide meaningful loan repayment information. ..................................................................... 24 Appendix A ................................................................................ A-1 Appendix B ................................................................................ B-1 ii Executive Summary The cost of a college education has skyrocketed in the last decade. Tuition, fees, room, and board (in current dollars) have increased at four-year public universities by over 70 percent and at four-year private universities by over 50 percent.1 Full-time students who borrow to finance four years of college, on average, owe about $20,000 at graduation.2 Families turn most often to college financial aid offices to help them navigate the complex college financing process. Yet, investigations by the New York Attorney General Andrew M. Cuomo and the U.S. Senate Committee on Health, Education, Labor and Pensions have uncovered evidence that financial aid offices at a few schools around the country have taken kickbacks from lenders. As a result, they may have recommended lenders that are not in students’ best interests. Families are confused by the college funding process. With three federal loan types (each with different rates, fees, and terms) and unlimited direct-toconsumer marketing of private student loans, it’s not surprising that students and parents make uninformed decisions that cost them more than necessary.3 Consumers (especially students without parental support and parents whose first child is headed to college) lack readily accessible and understandable information about the cost of a college education. They also lack unbiased, expert advice on the best way to borrow money to finance their education. Indeed, nearly 50 percent of undergraduate private student loan borrowers fail to exhaust their low-cost federal student loans to finance their college education.4 Currently, colleges, high schools, non-profit organizations, lenders, and the U.S. Department of Education (ED) use a scatter-shot approach – some successful and some unsuccessful – to educate and advise families about how to finance a college education. This approach misses opportunities to educate families and creates information roadblocks that prevent them from making informed borrowing decisions. The College Board, Trends in College Pricing 2006, 11 (Table 4b), (July 12, 2007). The College Board, Trends in Student Aid 2006, 12 (Figure 4a), (July 12, 2007). For a discussion of the three types of federal student loans (Perkins, Stafford, and PLUS) see Adam Stoll, Congressional Research Service, CRS Report for Congress, The Administration of the Federal Family Education Loan and William D. Ford Direct Loan Programs: Background and Provisions, September 29, 2006. For a discussion of the significant differences between federal and private loans see The Institute of Higher Education Policy, The Future of Private Loans: Who is Borrowing and Why?, December 2006, 5-11. 4 3 1 2 Catherine A. Wegmann, Alisa F. Cunningham, and Jamie P. Merisotis, The Institute for Higher Education Policy, Private Loans and Choice in Financing Higher Education, July 2003, 71. iii These findings are supported by recent economic research: complex and confusing information disclosures can lead consumers to make less than optimal decisions, especially for complex financing decisions such as consumer mortgages, and retirement savings and investments. Consumers Union (CU) undertook original qualitative consumer research in five major metropolitan areas with over 130 students and parents to develop practical policy recommendations to improve student loan counseling and to enhance student loan information disclosures. CU’s research focused on the student loan information needs and experiences of high school juniors and seniors, current undergraduates, recent graduates, parents of high school juniors and seniors, and parents of current undergraduate students. We identified several critical pieces of information that the federal government, colleges, lenders, and others can provide to families so that they can make informed choices about how to pay for college,5 including: • • • • • Communicating the annual cost that students and parents will have to pay to attend college; Advising on how to minimize the cost and total amount of student loans by exhausting federal loans before turning to private student loans; Counseling on personal finance basics for college students, particularly as they relate to student loans; Identifying and comparing rates and terms of private student loans, if needed to make up a shortfall; Providing an institution-specific financial aid profile that details the rates and terms of student loans that students like them have borrowed to attend that college; and Helping students to understand their own student loan terms and to identify the resources they will need to repay these loans after graduation. • Our recommendations about the timing and delivery of this information to families are grounded in four findings. First, students and parents had a diversity of information-seeking experiences, learned at different times, and had different information needs at each point in the college financing process. There is no one time or place where students and parents learned about how to pay for college in general or student loans in particular. Students and parents need to be exposed to relevant information early, often, and in context about their loan options. They need to be informed about the effects of their repayment obligations on their lives after graduation. Second, many student and parent borrowers sought an unbiased, trusted source of information that was easy to find and understand. In the vast majority of cases, students and parents relied on the college’s financial aid office to provide this unbiased information. Financial aid offices are often the only place that 5 Throughout this report, the terms “college” and “school” means any institution of higher education, including two- and four-year public and private institutions, trade schools, and other for-profit institutions. iv students, especially students without parental support, can turn for personal assistance. Yet recent revelations uncovered by the New York Attorney General and others describe a breach of that trust. Standardized consumer information and advice that is unbiased, clear, accessible, and relevant can help students and parents make informed college financing decisions. Third, students lack the personal financial sophistication necessary to make informed college funding decisions. This gap among high school seniors has been reported extensively by the Jump$tart Coalition for Personal Finance Literacy. Enhanced personal finance counseling for students, particularly regarding student loans, can address this financial literacy gap and help them make informed decisions about college financing. Fourth, students and parents generally did not revisit their college financing methods or sources once they found a way to finance their first year. For example, if the student or parent did not take advantage of federal aid or shop for the best-priced loan for the first year, they did not use federal aid or shop for a lender for the remaining years. Parents often shifted responsibility to students to navigate college financing after the first year. Students often replicated the first year funding sources and use of lenders. As a result, they compounded mistakes that could have been avoided and, with financial aid practices constantly changing (e.g., federal loan limits, interest rates), these mistakes could be very costly. Students and parents need to be alerted to potential pitfalls and options each year the student is in college. Students and parents identified several touchstones in the college funding process that could be improved to help them make informed decisions. These touchstones were used by a majority of families and they were an important part of that decision. The following recommendations, and the accompanying prototype disclosures, correspond to these touchstones. We encourage additional consumer testing of the prototypes to ensure understanding and usability. Summary of Recommendations 1. Emphasize early and often the comparative costs of different college funding sources and the need to shop around for federal and private student loans. Families often do not know to maximize scholarships and grants before using student loans to finance college. Even those who are ineligible for subsidized federal Stafford loans do not know that they should exhaust federal loans before turning to private student loans, and that they should never use credit cards to finance their college education. ED’s Student Financial Aid website provides general information on federal financial aid (e.g., the features of federal loans), but it fails to provide advice or strategies on how to use the information to minimize student debt. ED could improve the Free Application for Federal Student Aid (FAFSA) and Student Financial Aid websites to incorporate this advice. We encourage private entities that administer standardized college tests (e.g., the College Board, ACT) to provide these messages to parents and v students when they communicate PSAT, SAT, or ACT test scores. Likewise, the sponsors of the Common Application could incorporate these strategies into the tab on their website labeled “Advice” about financial aid. Implementation Responsibility: ED and others involved with educating students and parents about college financing. 2. Standardize key components of the college financial aid award letter. Student and parent review of the college financial aid award letter is an important “teachable” moment that colleges have missed. Colleges have failed to use this opportunity to provide parents and students with comprehensive information on college costs, financial aid that can reduce the cost they have to pay, and the conditions surrounding the aid awarded. The letters also failed to provide advice to help students and parents make informed borrowing decisions to meet their expected contribution. A standardized award letter can eliminate roadblocks inadvertently created by confusing formats and terminology about the cost of attendance, financial aid that does not have to be repaid, and loans, which do have to be repaid. It also allows for easy comparison across colleges of the expenses that students and parents are likely to pay. A larger version of the snapshot below accompanies the full explanation of the recommendation (see pages 14-18). Implementation Responsibility: Congress, ED, colleges. 3. Provide borrowers plain English disclosure of rates and terms about private student loans when the borrower receives loan approval. Students and parents were unaware that private student loans are substantially more expensive than federal ones. They did not know that private student loans generally carried higher interest rates that were variable and depended on their credit score, rather than the lower, fixed interest rates vi of federal loans. Many students and parents with private student loans, especially those who did not qualify for a federal Perkins or subsidized federal Stafford loan, believed it was not worthwhile to complete the FAFSA to be eligible for an unsubsidized federal Stafford loan. Clear and understandable disclosures provided when borrowers are still shopping around can help students and parents understand the rates and terms of their private student loans and compare their options easily. A snapshot of a prototype disclosure is below. A larger version of the prototype accompanies the full explanation of the recommendation (see pages 18-20). Implementation Responsibility: Congress, private student loan lenders. 4. Require student loan borrowers to participate in annual online financial literacy counseling prior to loan disbursements. Mandatory online counseling can help students graduate with less student debt because they will learn to budget to determine actual need, to identify low-cost student loans, to live more economically while in college, to be warned of excessive credit card debt, and to understand the income necessary to repay their outstanding student loans. Annual counseling provides students the opportunity to change their spending habits, financing methods, or even their college, when these actions can still make a difference. This counseling requirement would supplement the existing required federal entrance and exit counseling. Currently, entrance counseling informs students that loans must be repaid. Exit counseling provides students with information on repayment and the conditions under which deferments, vii forbearance, consolidation, cancellation, and forgiveness can be granted. Neither counseling session provides students with practical advice about how to assess their needs, to understand implications of repayment, or to decrease borrowing costs. Some colleges already require annual online counseling prior to every loan disbursement. ED (or a non-profit entity) could leverage these existing models to develop online courses for widespread distribution (i.e., share best practices among colleges). Additionally, financial literacy experts, including the U.S. Financial Literacy Education Commission and the National Council on Economics Education, could help develop these courses. Implementation Responsibility: Congress, ED, colleges. 5. Develop college-specific loan profiles that accurately describe the student loans that students and parents have borrowed to attend each college. The student loan scandals uncovered by New York Attorney General Cuomo and the Senate Committee on Health, Education, Labor and Pensions have shown how various financial arrangements between colleges and lenders have created real and perceived conflicts of interest. This recommendation is aimed at eliminating conflicts of interest and creating greater accountability for, and transparency of, student borrowing at each college. The profile would include statistics on the amount of student debt by entering class, the interest rates, fees, APRs, repayment amounts, loan term, and the lenders used. It also would include historical default rates for the college by the lender. Disclosure of amounts, rates, and terms of student loans, and the borrowing patterns of students at each college will allow college financial aid offices to set benchmarks and evaluate the borrowing of their students – and thereby their own performance in recommending loans. This added transparency will also allow college financial aid offices to develop preferred lending lists based on a lender’s actual lending practices to students at the college. Implementation Responsibility: Congress, ED. 6. Report the rates and terms of private student loans made to students (by college) to the U.S. Department of Education. Lenders of private student loans should report loan amounts, rates, and terms (on a student-bystudent basis and college-by-college basis) to ED. ED can use the aggregate data (stripped of personally identifiable data) to develop the college lending profiles described in Recommendation 5. Access to this private student loan data for purposes other than for the college lending profile and the Student Access system (Recommendation 7) would be prohibited. Implementation Responsibility: Congress, ED, private student loan lenders. viii 7. Improve the National Student Loan Data System (NSLDS) Student Access and Student Aid Report to provide meaningful loan repayment information. Currently, students do not have one place where all of their outstanding educational loans (both federal and private) are tallied and projected payments are detailed. In addition, current disclosures from the NSLDS are confusing and potentially misleading about repayment obligations. Students should be able to receive customized information that includes minimum monthly repayment amounts based on the actual term and interest rates, total amounts repaid, and salary ranges necessary to repay their federal and private loans. Accurate repayment information can help students understand the income necessary to repay their outstanding loans. Implementation Responsibility: ED. * * * * * We recognize that these recommendations are not a substitute for active engagement of both parents and students in evaluating college financing options. Lenders and marketers recognize that prospective college students are a new audience to tap, and thus make a concerted effort to obtain new customers. Indeed, there are no limits on the direct-to-consumer marketing of private student loans. Students about to enter college are often the least equipped to understand the complex nature of many financial products and the long-term implications of their financial decisions. Implementation of these recommendations could arm parents and students with information so that they make informed borrowing decisions. In a nutshell, we recommend that every student and parent know the following: • • • Tap federal loans first, everyone qualifies regardless of need; Limit private student loans because their costs are higher; and Never finance college with credit cards. ix Introduction The cost of a college education and student debt levels have skyrocketed over the last decade. According to the College Board, total tuition, fees, room, and board (in current dollars) have increased at four-year public universities by over 70 percent and at four-year private universities by over 50 percent.6 Moreover, student loan borrowing has been growing faster than grants, scholarships and other aid that does not have to be repaid. The average amount borrowed for a four-year degree in 2003-04 was $19,300, up from $12,100 a decade earlier.7 Bachelor’s degree recipients who borrowed to finance their education accumulated median debt levels at graduation of $24,600 in for-profit institutions, $19,500 in private nonprofit colleges, and $15,500 in public institutions.8 Indeed, nearly two-thirds of students attending four-year public colleges or universities now rely on student loans to finance their education.9 Recent investigations and revelations by the New York Attorney General Andrew M. Cuomo and the U.S. Senate Committee on Health, Education, Labor and Pensions have shown that the financial aid offices at a few schools across the country have taken kickbacks from student loan companies and reaped other benefits while making it harder for students to get good deals on their student loans. The Senate Committee recently released an investigative report concluding that many student loan lenders “routinely engage in marketing practices” that violate the law.10 Given the breadth of the evidence uncovered by the Senate Committee investigation, illegal student loan marketing activities are “systemic and cannot be isolated to a few ‘problem’ lenders or schools.” This is even more disturbing given that high school seniors lack personal financial sophistication to make informed college financing decisions. 11 For example, nearly 50 percent of undergraduate private student loan borrowers fail to exhaust their low-cost federal student loans to finance their college education.12 6 College Board, Trends in College Pricing, 11 (Table 4b). College Board, Trends in Student Aid, 12 (Figure 4a). College Board, Trends in Student Aid, 12. 7 8 9 Heather Boushay, Center for Economic and Policy Research, Student Debt: Bigger and Bigger, September 2005, 2. United States Senate Health, Education, Labor and Pensions Committee, “Report on Marketing Practices in the Federal Family Education Loan Program,” June 14, 2007, 49. In its 2005-06 nationwide survey of financial literacy among high school seniors, the Jump$tart Coalition for Personal Financial Literacy reported that on average, students scored just over 50 percent. The Jump$tart Coalition, “Financial Literacy Shows Slight Improvement Among Nation’s High School Students,” April 5, 2006. 12 11 10 Catherine A. Wegmann, Alisa F. Cunningham, and Jamie P. Merisotis, The Institute for Higher Education Policy, Private Loans and Choice in Financing Higher Education, July 2003, 71. 1 With the rise of student loan indebtedness, the lack of financial sophistication of students, and the widespread actual and perceived conflict of interest at college financial aid offices, Consumers Union undertook original consumer research to identify ways to enhance student loan information disclosures and to improve student loan counseling. The objective was to ensure that students and parents could identify the most affordable loan choices and understand the resources necessary to repay them. Economic research confirms the intuition that consumer confusion about terms and conditions of products and services can lead to sub-optimal decision-making. Recent field experiments in areas as diverse as consumer selection of mortgage products, public schools, and retirement savings and investment products, have shown that confusing and complex information disclosures can cause consumers to make decisions that they otherwise would not have made had the relevant information been presented in a clear and timely manner. 13 Indeed, the staff of the Federal Trade Commission recently concluded that when consumers do not understand the costs and terms of their mortgages “they may pay more for their mortgage than necessary, obtain inappropriate loan terms, fall prey to deceptive lending practices, and experience unpleasant surprises and financial difficulties during the course of their loans.”14 Needless to say, these same outcomes can occur when financing higher education through student debt. Methodology Consumers Union conducted qualitative market research in two phases, with over 130 students and parents, in five major metropolitan areas (Atlanta, Boston, Chicago, Los Angeles, and New York) with a wide range of borrowing needs, student loan debt levels, household incomes, and college choices.15 In the first phase, CU conducted focus groups among recent graduates, current undergraduates, and parents of undergraduates in Atlanta, Boston, and New York about their understanding of the college funding process and student loans in particular. Through these focus groups we obtained an understanding of the information sources they found most helpful (and least helpful) in learning about student loans generally and in helping them identify and select loan products and lenders. We also obtained an understanding of how parents and students used information to help them assess the implications of repayment. Based on the issues identified in the first phase, CU developed policy recommendations and supporting disclosure prototypes to increase the Federal Trade Commission Bureau of Economics, Improving Consumer Mortgage Disclosures, June 2007 (mortgage disclosures) (“FTC Bureau of Economics”); Justine Hastings, Richard Van Weelden, Jeffrey Weinstein, National Bureau of Economic Research, Preferences, Information, and Parental Choice Behavior in Public School Choice, NBER Working Paper 12995, March 2007 (public school choice); James J. Choi, David Laibson, and Brigitte C. Madrian, National Bureau of Economic Research, Reducing the Complexity Costs of 401(k) Participation through Quick Enrollment™, NBER Working Paper No. 11979, January 2006 (retirement savings and investment). 14 13 FTC Bureau of Economics, Improving Disclosures, ES-12. Appendix A contains a description of the participants. 15 2 understanding of the college financing process. We obtained input from experts (college financial aid advisors, non-profit policy and advocacy groups, and financial literacy and disclosure experts) on the recommendations, and we used the principles of plain English disclosures to develop the prototypes.16 In the second phase, we tested the recommendations and the accompanying prototypes for usability and utility in focus groups of current undergraduates, high school juniors and seniors, and parents of high school juniors and seniors in the New York area. We refined the recommendations and prototypes based on the preferences expressed by these consumers. We then retested them among the same three groups of consumers in Chicago and Los Angeles to arrive at the prototypes included in this report. Summary of Learning from Students and Parents Who Have Navigated the Student Loan Process Students and parents each had their own story about how they learned about how to pay for college in general and their use of student loans in particular. Their comments evidenced the challenges facing students and parents as they pay for college. The participants were frustrated by the complexity of the process. They expressed concern over whether they had obtained the best student loan deal. Some, but not all, of the participants were concerned about the income necessary to repay their loans. To gain an understanding of college funding, and student loans in particular, we explored the following five areas: (1) how the cost (tuition, room, board, books, transportation) affected school selection; (2) who and what resources students and parents used to understand how to pay for college; (3) the specific student loan information sources they used and found most helpful; (4) the funding sources used for college; and (5) the repayment obligations of student loans. 1. Cost of Higher Education Students and parents had various perspectives on how a college’s cost affected their decision on which college to attend. Some parents and students explained that if the student was admitted by the college with an academic program or reputation they wanted, they did not want cost to be an issue. Others explained that cost was not an issue when they applied, but that after being admitted, they chose the best college for the money. The best college could be one that had a major or program in the student’s chosen field, was close to home or work, or provided a scholarship. Some students at two-year colleges mentioned that they could not afford a four-year private school immediately, and would transfer upon completion of their two-year community college program. Others mentioned they planned to go to graduate school, so they were trying to keep the cost of undergraduate education low. Still others indicated that they limited their choices to in-state schools that had lower tuition for residents. 16 Office of Investor Education and Assistance, U.S. Securities and Exchange Commission, A Plain English Handbook, How to create clear SEC disclosure documents, August 1998. 3 2. General Information Sources on How to Pay for College Parents and students reported being initially overwhelmed by the hunt for information and money to pay for college. First-timers (e.g., parents with their first child going to college or students without parental assistance) seemed to find their own way toward the information they needed, although they were unsure whether they had done the right thing. Students and parents were inundated with descriptive information about the sources to pay for college, but they did not have a clear strategy on how to minimize the amount of borrowed money. A freshman attending a private four-year university in the Chicago area explained that because she was first in her family to go to college, she thought strategic advice on how to prioritize different funding sources “would be helpful at the beginning of the [college funding] process.” In addition to talking with family and friends, students and parents used high school guidance counselors, the college financial aid office, college fairs, seminars hosted by lenders, financial magazines (e.g., Kiplinger’s, Money), and their accountants or financial advisors. Many parents and students started to learn about federal student aid at least two years before entering college (e.g., when the student was a junior in high school and starting the PSAT/SAT preparation process). Figure 1 describes the process to determine a student’s eligibility for federal financial aid. Early in the process, parents and students recalled the more general information sources. During this time period, parents and students indicated that they spent most of their time preparing for college (e.g., doing well in school, preparing for the SAT test), identifying colleges that met their academic needs, and finding out how to be admitted to the college(s) of their choice. Figure 1: The Process to Determine Federal Student Financial Aid To determine how much federal student aid (scholarships, grants, work-study, and loans) a student is eligible for, the student/parent must complete the following three steps each year the student attends college. 1. Complete the Free Application for Federal Student Aid (FAFSA). Federal student aid is generally awarded based on a student’s financial need with the exception of certain loan products (unsubsidized Stafford loans). All students should complete and submit the FAFSA because it is required for all federal aid. To determine a student’s financial need, the FAFSA asks questions about income and assets that could be used to pay for the student’s college education. The FAFSA cannot be completed until after January 1 of the year the student expects to start college. The U.S. Department of Education uses this information to calculate the Expected Family Contribution (EFC). 2. Review the Student Aid Report (SAR). The result of the FAFSA is the SAR. It contains the EFC calculation for the student. The SAR is transmitted to the colleges that the student/parent has identified on the FAFSA. The SAR also lists the student’s outstanding federal loans. 3. Review the College’s Financial Aid Award Letter. Once the student has been admitted, the college provides a financial aid award letter to the student that lists the grants, scholarships, work-study, and loans for which the student is eligible. The letters vary in the amount of information provided to the student and parent and it is provided in a format of the college’s choice. This award is based on the college’s cost of attendance (all direct and indirect expenses, including tuition, fees, room and board, books, transportation, and supplies) less the EFC. Students and parents explained that they did not identify the loans that they would need until the student was admitted to college and they received the college’s financial aid award letter. A parent of a four-year student in Boston summed up this learning process when he said, “I looked into [how to finance 4 college] earlier, but I wasn’t sure what I would get [until my son was admitted].” Even then, students and parents discussed how they were often in a rush right before school started to line up their financing sources. When they received the financial aid award letter (often in the late spring of their senior year in high school), they began to figure out the amount they would be expected to pay. A sophomore at a four-year college in the Boston area summed it up when he commented that the financial aid award letter allowed him “to see how much I needed to make up in loans.” Several current and former students indicated, however, that they had borrowed too much because they did not understand the costs they would have to repay. Not only do the financial aid award letters fail to provide students and parents with the information they seek to make informed decisions, but the terminology and format used make it difficult to understand the award provided. Several students explained how they did not understand the language used in their letter and that they called their college’s financial aid office for help.17 Our research found that some financial aid award letters fail to inform students and parents about items that they were most concerned about including: • • • • • • • • • A breakdown of the direct (e.g., tuition, room, board, and fees) and estimates of the indirect expenses (e.g., travel, books, etc.) of one year of college, The financial aid awarded that the student does not have to repay (e.g., scholarships and grants), The conditions under which scholarships and grants are renewable each year, The amount of work-study and the condition under which the student has to fulfill the work-study, The loans for which the student is eligible, The loans for which the parent is eligible, The interest rates, loan terms, monthly repayment amounts, and total repayment amounts of loans for which the student/parent is eligible, The actual net amount (cost of attendance less financial aid offered) that the student and parent will have to pay to attend one year of college, and Where a student and parent can seek additional information. Students and parents explained how all of this information is critical to the college financing decision. One current student at a two-year school in the New York area captured this perspective when she suggested that, “when [the college] send[s] you an admission letter that you have gotten into college, they should For more information about the uneven quality of college financial aid award letters among colleges see the website Financial Aid Letter. (July 12, 2007). This website was developed by Kim Clark and Peter Jaegersen under the auspices of Ohio State University's Kiplinger Program in Public Affairs. It displays real financial aid letters and then allows users to decode them into plain English. It also features a comprehensive interactive financial aid dictionary. 17 5 send a small booklet that should be solely, like in big print, about how to finance your education.” 3. Specific Information Sources about Student Loans Current students and many parents did not understand the significant differences between federal and private student loans.18 Other than knowing the names of federal loans (e.g., Stafford and Perkins), parents and students could not recall interest rates or eligibility criteria for federal loans. They did not realize that federal loans have fixed interest rates whereas most private student loans have variable interest rates, and most have no cap on that rate’s upper limit. Nor did they know that private student loans usually have more onerous terms (e.g., repayment penalties), and less flexible repayment options than federal loans. Students were generally unaware that private student loans charged variable interest rates based on the borrower’s credit score. Indeed many thought the rates for federal and private student loans were the same. This confusion could be, perhaps, because a lender can offer a student both a federal Stafford loan and a private student loan. A sophomore at a Los Angeles-area community college who had a private student loan at 11% wanted to know “what the catch was” for 6.8% interest rate for federal Stafford loans. They also expressed confusion over the concept of interest capitalization. Student and parent borrowers of private student loans, especially those who did not qualify for federal Perkins or subsidized federal Stafford loans, believed it was not worthwhile to complete the FAFSA to qualify for an unsubsidized federal Stafford loan. A typical comment illustrating this point was made by a sophomore at a four-year public school in California when he said that “the [Federal] government doesn’t really help you out [in paying for college].” For those students and parents with some financial sophistication, concerns about the terms and conditions of private student loans, included information on: • • • • • • • • • Interest rates – fixed or variable over the loan’s term; Minimum monthly payments; Disbursement fees; If a variable rate, the monthly repayment amount that could be required if the interest rate rose to the maximum amount; When the borrower becomes responsible for interest payments; When repayment starts; Interest capitalization; Projections of interest paid over the term of the loan; and Penalties for early repayment. A number of students and parents indicated that one of easiest things to do in the college financing process was to apply and borrow a private student loan. One For a discussion of the differences between federal and private loans see The Institute of Higher Education Policy, The Future of Private Loans: Who is Borrowing and Why?, December 2006, 5-11. 18 6 parent in New York explained how private student loans were substantially easier to borrow than federal loans. Student and parents wanted the private student loan information in simple terms, with explanatory text next to the numbers. They also expressed a strong preference for customized information that was specific to their loans. A recent graduate now working in New York with a monthly student loan repayment amount of $1,000 described how she, “kind of felt like not enough information was given, because I was kind of like, walking in the dark.” Students and parents turned to varied sources for advice about federal and private student loans. The main sources included family (parents and siblings), friends, and the college’s financial aid office (and the college’s financial aid website). Parents and students alike referred to financial magazines, and a couple of the two-year students used books and resources including librarians/personnel at the public library. Students and parents used the Department of Education’s (ED) FAFSA site, and a variety of websites such as fastweb.com (for scholarships), daveramsey.com, clarkhoward.com, collegeboard.com, salliemae.com, Yahoo! Finance, and the Motley Fool (fool.com). Many students simply typed “student loans” in an Internet search engine. The students also reported that they were bombarded (from junior year of high school through at least college graduation) with loan solicitations from private student loan lenders both in the mail and via email. For example, a senior at a public four-year university in Atlanta explained how he received private student loan marketing materials with come-ons like, “This is your third notice, apply now for [a student loan].” To a lesser extent high school guidance counselors provided advice, but students and parents often said the advice was limited to help in filling out the FAFSA and other college entrance materials, rather than help identifying affordable loans. In an ideal situation, many parents and students would use a non-profit, thirdparty source to help them learn about, and evaluate, their loan options. The key was that the website had to have visibility, possibly connected with the school’s financial aid office. A sophomore at a two-year school in Boston highlighted the need for visibility of trusted information because “the private loan companies are very visible, you have to compete with them.” A. Mandatory Federal Student Loan Counseling Another way students learned about federal loans was through mandatory student loan counseling. Current federal requirements include entrance counseling and exit counseling. Entrance counseling essentially informs students that loans must be repaid, but does not provide practical advice about understanding the costs of repayment or whether they got the best possible deal on their loan. Exit counseling occurs right before the student graduates and after the student is legally obligated to pay back their loans. Exit counseling provides students with information on repayment (e.g., when it begins, repayment amounts, etc.) and information about conditions under which deferments, forbearance, consolidation, cancellation, and forgiveness can be granted. 7 Current students discussed how counseling, both online and in person, during their first year had not been meaningful to help them make informed borrowing decisions. Typical of the comments made was one by a senior at a public fouryear university in Atlanta. She described her online entrance counseling as “just something I needed to do to get my money.” She went on further to state that the counseling took the form of “a quiz where you didn’t even have to really read it, as you could go back and change [your] answers.” Current students could not recall the content of the entrance counseling other than the idea that loans must be repaid. They stated that the timing of the counseling -- usually during freshmen orientation -- had not been an appropriate time to convey this material. A freshman at a four-year private university in Atlanta summed it up when he explained, “[its] kind of like a buzz kill in the middle of the second day [of freshmen orientation], everybody’s all wound up already, they’re not going to pay attention.” Recent graduates suggested that the federally required exit counseling was useful, but that it had come too late for them to change their borrowing behavior. Once they received their counseling, they could not reduce the amount they had borrowed or obtain better terms on their existing student loans. B. The College Financial Aid Office Students and parents sought a trusted source – such as personal counseling – to help them understand college financing, with specific help to identify low-cost loans. They indicated that the Internet was helpful, but insufficient for this purpose. Many students expressed the same thought that a senior at a private four-year university in Boston voiced when she advised others to “form a relationship with your [financial aid] counselor and suck up a little bit.” Many students and parents explained how they borrowed student loans that were recommended by the college, either by the type of loan or the lender. Several students told stories about how they applied and took the student loans that the schools’ financial aid offices suggested, without examining other options. Parents and students expressed how they wanted to be told what to do. A firstyear student at a for-profit New York business college explained how she borrowed the loans her counselor had suggested: Because they knew basically how much I needed to take out, what I needed it for, they basically gave me the information I was looking for. My main concern was how long they would give me to pay it back [and] what my monthly payment [would be]. So when I spoke to my financial aid counselor, she explained all the questions that I had. Not surprisingly, these parents and students were unaware that they had choices, or that the choice of lender mattered in terms of the cost of the loan. This perceived lack of choices could be because they were taking Direct Loans, or that the choices among federal Stafford loans in the Federal Family Educational Loan (FFEL) program did not vary in a way that mattered to the 8 participants. Most students trusted that the school informed them of the best or only options for which they were eligible. Students explained how they obtained loans from lenders without understanding whether they had obtained a federal or private student loan. C. Preferred Lending Lists When probed about what it meant for a lender to be on a school’s preferred lender list, students and parents explained various positives and negatives. On the one hand, some students and parents believed that these lenders had the best interest rates and terms. Others indicated that the list eased the amount of research they had to do, because the school did it for them. Lenders on the list were reputable and you could trust them. A comment by a senior at a private four-year college in Boston typified these statements when he said, “I would assume they were looking out for my best interest.” Some students also expressed the idea that because the college and the lender worked together, they could easily solve any administrative difficulty or payment delay that a student encountered. On the other hand, some parents and students were skeptical of the relationship between the school and the lender. A parent in New York with two children who each had approximately $100,000 in student loans suggested that her view of the list depended upon how much the parent had to pay. For example, if the parent had to pay 20 percent of the total cost, she would turn to the preferred lender list. On the other hand, if the school did not chip in with a lot of aid, she would look elsewhere for loan products because she did not trust whether the list had her best interests at heart. Nearly all students and parents had difficulty understanding how to choose a lender from preferred lending list. For federal Stafford loan preferred lending lists, students and parents had substantial difficulty understanding how to compare loan credits and interest rate reductions after on-time payments for 36 months. They explained how there was no way to compare these discounts and benefits on an apples-to-apples basis. For private student loan preferred lists, parents and students felt it could be a place to start, but that they would still have to apply to one of the lenders on the list. The private student loan borrowers explained how they had gone to the bank at which they had a preexisting relationship (or the bank with the greatest name recognition) and inquired there as a first and, in many cases, only step. For subsequent years, most parents and students had just reupped the loan with the lender. 4. Funding Sources Used Students and parents used a variety of sources to fund the cost of college. They used scholarships, grants, college savings programs, work study, and current earnings. Students and parents borrowed federal and private student loans. Some students used credit cards and then paid them off with earnings. Some employed students used tuition reimbursement while two four-year students in 9 Atlanta mentioned that they had joined ROTC in order to pay for college. Parents mentioned a variety of additional sources including accessing home equity, withdrawals from retirement plans, and personal loans to pay for their children’s education. Although the students and parents could recall various sources, they were unsure whether they understood which sources were less expensive than others. Typical of this lack of knowledge was the comment made by a sophomore at a two-year college in the Boston area: “You can just put it [the tuition bill] on your credit card and you don’t have to take out a loan…” Parents and students allocated the workload for researching college funding in different ways. For example, some parents did most of the research, filled out the FAFSA, and made the funding decisions, with very little involvement from their children. Some students were responsible for locating scholarship information or obtaining loan applications, etc. Some parents did the initial work (prior to the freshmen year), and the students were responsible for replicating the process in their sophomore, junior, and senior years. Some students, many of whom were independent of their parents, performed all of the research and paid for college on their own. These students often were the ones that failed to fill out the FAFSA, because they were unaware of it, had encountered administrative problems with the FAFSA password process, or could not obtain the data from their parents necessary to complete the application. Some two-year students did not understand how to pay for college until immediately before classes began. A typical comment was made by another sophomore at a two-year college in the Boston area who said, “It didn’t really hit me how to pay [for college] until I had to pay the bill.” 5. Understanding Repayment Obligations Students and parents voiced two distinct viewpoints about whether they wanted to know how much debt they were taking on and how it would affect their future choices. On the one hand, current students wanted to know (and some recent graduates wish they had known) how much debt they were taking on and how they would be responsible for it after graduation. A senior at a four-year college in Atlanta summed this situation up when she said she had thought she was doing all the rights things by going to college to better herself. But now she was burdened with $80,000 in loans to repay. “I feel when you take out so much loans, I feel like, dang, I’ve got to get married so I can survive, or I’ve got to do something.” On the other hand, several current students were not interested in learning what their expected monthly repayment would be or the income necessary to make such a payment. One student explained how he had “blind faith” that he would be able to pay it back. Some participants – especially parents – stated that knowing the amount would not make a difference in how much they would borrow because they would still need to obtain loans to pay for college. Some current students explained how college was a time for them to enjoy and they would worry about repaying loans later. These students were reluctant to use an 10 online tool or to participate in personal counseling that would help them understand how their debt repayment may affect their future. Many recent graduates suggested that their exit counseling was useful, but that it had come too late. When probed about what they would have done differently had they been informed about their prospective debt load, the answers included: • • • • Search for additional scholarships; Work during school; Change their spending habits; and Consider whether to change to a less-expensive college. These students also believed that they had a poor understanding of personal finance in general. Many parents said they were unhappy with the children’s level of financial sophistication. These student and parents expressed the need for more education about the financial decisions facing them as they left college. One recent New York-area graduate’s comment expressed this sentiment: When I graduated college or when I got my first job, I would [have] liked to [have gone] to this seminar and have been told like, this is going to be your life for the next 30 years, and this is what you have to do, and this is what you have to invest in. I feel like I’m still always piecing information together. Other students stated that they became more receptive to understanding the income requirements to repay their loans as they became more involved with the process. They expressed keen interest in knowing what salaries would be required to service their debt. Current undergraduates (and current high school juniors and seniors) displayed little understanding of what they could expect to earn once they graduated. As noted above, some parents did the initial work, but required their children to replicate the process in their second and later years. Some students indicated that they would have liked a “reality check” at these points. A recent graduate working in Atlanta with approximately $100,000 in student debt suggested “it is not that big a deal to have an annual counseling requirement given how much money I owe.” 11 Implications and Recommendations Students and parents identified several touchstones in the college funding process that could be improved to help them make informed decisions. These touchstones were used by a majority of students and parents, and they were an important part of the college financing decision. The following recommendations correspond to each of these identified touchstones. Accompanying recommendations 1, 2, 3, and 7 are prototype materials that CU developed to test whether the recommendation would be effective. We encourage further testing and refinement of each prototype to ensure consumer understanding and usability. Recommendation 1: Emphasize early and often the comparative costs of different college funding sources and the need to shop around for federal and private student loans. Justification: Parents and students start to learn in the sophomore year in high school about how to finance a college education. At this point, they often seek a trusted source to help them understand the process. Our research uncovered the fact that few students and parents understand two key aspects of college financing options at this point. This was especially true of independent students and parents whose first child was to enter college. First, they did not appreciate the need maximize the sources they do not have to repay. Second, they did not understand that they should shop around and compare different student loan products and lenders. Moreover, they did not appreciate the significant cost differences between federal and private student loans. We encourage high schools, colleges, the Federal Government, and entities such as the College Board and other unbiased and trusted information sources to provide parents and students with these two messages. An example of one way to present this information is shown in Figure 2. These messages need to be provided early, often, and in context. A senior at a four-year public university in Chicago explained how this information, “kind of guides you to get the best way of paying your school off.” Recommended Enhancements: ED could use the following opportunities to communicate these messages more clearly and effectively in the college financing process. This list is not exhaustive. • Add a fourth step (there are currently three) to the FAFSA homepage that provides advice on how to fund college (STEP 4: UNDERSTAND HOW TO PAY FOR COLLEGE). Nearly all of the parents and students completed the FAFSA online, so a simple enhancement to the FAFSA website provides an opportunity to reach nearly every college student annually. ED could include 12 13 a tab under STEP 4 entitled “Low Cost Ways to Fund Your College Education” that includes the messages identified above. • Improve the Student Financial Aid (SFA) website to provide advice about the relative merits of different forms of financial aid and loan products. Currently, most information on the SFA website is general, fails to explain why it is relevant, and does not provide advice or strategies on how to use the information to minimize student debt. For example the “Funding Your Education” tab (http://studentaid.ed.gov/PORTALSWebApp/students/english/funding.jsp) currently provides information about new federal grant programs. It does not provide the overview advice and strategies that students and parents seek as they fund their college education. The College Board and ACT also could provide these two messages to parents and students when they receive their PSAT/SAT/ACT scores. Moreover, the sponsors of the Common Application (a not-for-profit organization that uses one admission application that students may submit to nearly 300 participating colleges) could improve their financial aid section by providing basic financial aid advice to students and parents based on these messages. The success and effectiveness of these messages depends on making them relevant to the consumer, and providing them with an easy way to obtain additional information. The messages need to be placed where students and parents are likely to see and act on them. Recommendation 2: Standardize key components of the college financial aid award letter. Justification: Student and parent review of the college financial aid award letter is a “teachable” moment that colleges have missed. Colleges have failed to use this opportunity to provide parents and students with comprehensive information on college costs, financial aid that can reduce the cost they have to pay, and the conditions surrounding the aid awarded. The letters also fail to provide advice to help students and parents make informed borrowing decisions. Standardization of key components of the letter eliminates roadblocks inadvertently created by confusing formats and terminology about the cost of attendance, financial aid that does not have to be repaid, and loans, which do have to repaid. Standardization also allows for easy comparison across colleges of the expenses that students and parents are likely to pay. Figures 3 and 4 contain a two-page financial aid award letter prototype that builds on concepts in the National Association of Student Financial Aid Administrators’ (NASFAA) Award Letter Evaluation Tool.19 We tested the 19 National Association of Student Financial Aid Administrators, Award Letter Evaluation Tool, at www.nasfaa.org/. The tool provides voluntary guidelines on the contents of the financial aid award letter. 14 15 prototype with parents and students against two existing financial aid letters contained in Appendix B. Page one contains summary information and, page two contains information families need to know to make an informed borrowing decision. We encourage further testing of the content, format, and terminology to ensure consumer understanding and usability.20 Page one summarizes the amount families are expected to pay to attend the college. Many existing college financial aid award letters list only the available financial aid, omitting the full cost of attendance and the amount students and parents must pay. This amount is vital information, especially for incoming freshmen deciding which college to attend. Students and parents both wanted to know the amount they are expected to contribute, without having to make a calculation (calculations which sometimes require figures not in the letter). The letter also provides a complete picture of the college’s direct and indirect costs at the time they need to know it. Although colleges make the cost of attendance available, it frequently is not provided on the financial aid award letter. Clearly listing indirect expense estimates (personal expenses, travel, insurance, etc.) helps define a student’s budget for the year and alerts them to the fact that colleges may estimate indirect expenses differently. When indirect costs are not presented clearly, students and parents miss an important opportunity to stop and consider the costs they will face. Page two of the letter lists scholarships, grants, and work-study awarded to the student. The letter also lists any conditions to renew or maintain scholarships and grants for subsequent academic years and the requirements for obtaining and keeping work-study jobs. In our testing, parents found this information helpful and often were unaware to ask for this information on their own. The letter identifies the federal loans for which the student and parents are eligible. Our research uncovered the fact that students from families with annual incomes greater than $80,000 often did not borrow unsubsidized federal Stafford loans for which they were eligible. Students and parents thought that they did not provide many advantages compared to private student loans. One way to address this issue is to list the interest rate of the loans for which the student is eligible, highlighting the favorable benefits of federal loans. Students and parents also should be alerted to the fact that they are not required to use a lender the college recommends and that the college is required to deal with any lender a student or parent selects. In addition, students and parents need to be reminded to shop early for their student loans so that they are not forced to take loans with unfavorable rates, terms, and conditions at the last minute when they are required to pay their college costs. The letter informs students and parents whether they are required to accept all, part, or none of the award and provides instructions on how to do so. For another discussion of the necessary elements of a standardized financial aid award letter see Mark Kantrowitz, Standardize Financial Aid Award Letters, Inside Higher Ed., (June 22, 2007) (July 12, 2007). 20 16 17 Finally, the letter provides examples of the terms and repayment of a typical private student loan for the amount the students and parents are required to pay. Students were often shocked to learn how expensive private student loans could be compared to federal loans. This fact needs to be highlighted when students are determining which college to attend and how to pay for it. Review of the financial aid award letter is one of the few times that parents and students stop to carefully consider their college financing options. A standardized financial aid award letter that is clear and easy-to-understand would be an invaluable tool to communicate the true costs of college and the best way to pay for it, allow students to compare among colleges, and help families make wise decisions about financing college. Recommendation 3: Provide borrowers plain English disclosure of rates and terms about private student loans when the borrower receives loan approval. Justification: Students and parents were unaware that private student loans are substantially more expensive than federal loans. They did not know that private student loans generally carried higher interest rates that were variable and depended on their credit score, rather than the lower, fixed interest rates of federal loans. Many students and parents with private student loans, especially those who did not qualify for a federal Perkins or subsidized federal Stafford loan, believed it was not worthwhile to complete the FAFSA to be eligible for an unsubsidized federal Stafford loan. Content of the Disclosure: Figure 5 contains a prototype one-page private student loan disclosure that lays out the information borrowers need before making a student loan commitment. The prototype disclosure contains a warning box that private student loans are more expensive than federal loans. The prototype recommends that the student check with the college’s financial aid office to obtain federal financial assistance. It also provides a reference point so that students and parents know that newly issued unsubsidized federal Stafford loans (for which all students regardless of income are eligible) have an interest rate of 6.8%. The text in this warning box is critical to help students and parents understand that private student loans are more expensive than federal loans. It is insufficient to state that “the borrower may qualify for Federal financial assistance through a program under Title IV of the Higher Education Act of 1965” or “that a Federal student loan may provide the consumer with more beneficial terms and conditions, including a lower annual percentage rate and fewer and lower fees, than private educational loans.”21 Rather, the message needs to state how federal loans cost less than private loans. 21 Student Loan Sunshine Act, H.R. 890, 110th Congress, 1st Session, § 4 (e) Disclosures Relating to Private Education Loans. 18 19 It is important to highlight the interest rate difference between federal and private student loans. It also is important to emphasize that all students, regardless of need, qualify for unsubsidized federal Stafford loans. Students and parents with household incomes greater than $80,000 often thought they did not qualify for federal assistance. They need to be reminded that they qualify for favorable federal loans at the time when they are considering more expensive private student loans. In addition to the warning box, the top half of the prototype describes the principal amount, Annual Percentage Rate (APR), fees paid, the minimum monthly payment, the term of the loan, and the total repayment amount assuming the APR does not change. The bottom half of the model provides additional information and explanation of more complicated terms of a loan including whether the interest rate is fixed or variable, additional disclosures if it is variable, repayment penalties, and details on difficulty with repayment. These disclosures address the deficiency in current law which fails to require lenders to inform borrowers about how their minimum payment could change if their interest rate were to rise. When lenders describe the rates and terms in an understandable uniform format, students and parents can easily choose a private student loan that meets their needs. Our research showed that some borrowers would choose a loan based on the APR and repayment period, while others were interested in whether there was a repayment penalty or an interest rate cap on a loan with a variable interest rate. Timing of the Disclosure: Even with enhanced disclosures, if borrowers receive them after it is too late to shop for another loan or switch to a less expensive college, the disclosure will be ineffective. Our research uncovered the fact that consumers want lenders to provide the information in the prototype once the lender has approved the loan and set an interest rate that the borrower will pay. Receiving the disclosure at this time would permit them to understand the terms fully and to shop for another loan if they so desire. This recommendation is consistent with recent Government Accountability Office findings that more effective consumer disclosures are necessary with complex financial products. Much like credit card disclosures, current private loan disclosures bury important information in the text, use terms that persons without financial sophistication do not understand, and use small typefaces.22 GAO Report, “Credit Cards: Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosures to Consumers,” GAO-06-929, September 2006. 22 20 Recommendation 4: Require student loan borrowers to participate in annual online financial literacy counseling prior to loan disbursements. Recommendation: Require annual online counseling prior to loan disbursements in the spring semester (or 2nd quarter) of the freshmen, sophomore, and junior year that provides personal finance content for college students. Some colleges already require online counseling prior to loan disbursement. For example, the University of Illinois at Chicago requires students to complete an online course prior to student loan disbursement that teaches students basic personal finance skills.23 ED (or a non-profit entity) could leverage these existing models to develop online courses for widespread distribution (i.e., share best practices among colleges). Additionally, financial literacy experts, including the U.S. Financial Literacy Education Commission and the National Council on Economics Education, could help develop these courses. Justification: Recent undergraduates were generally satisfied with the content of the current exit counseling. They explained, however, that the personal finance content came too late in their college career to make an impact on their existing loans or spending habits. They wanted to learn the personal finance-related content (budgeting to determine actual need, identifying low-cost loans by understanding terms such as APR and interest capitalization, living more economically while in college, warning about the hazards of credit card debt, and explaining post-graduation income necessary to repay loans, etc.) at an earlier time. They also would have been interested in personal assistance in reviewing loan choices they had already made to determine if they could obtain a lower cost loan for their remaining years in college. Students and parents both had difficulty choosing a lender from college preferred lender lists and often fell back on “their bank” with which they had an existing relationship The timing of the counseling is important. Entrance and exit counseling currently occur around first-year orientation and graduation – when students are overwhelmed with countless other new information and decisions. At the beginning of the spring semester (or second quarter), students have some experience with college life. Financial counseling (for budgeting and spending) will be more relevant to them at that time, and would give them the opportunity to change their spending habits, financing methods, or even their college, when these actions can still make a difference. At the conclusion of the counseling, students should be able to receive personal assistance to answer any questions they may have. Many students explained how they were frustrated when they sought help from the college financial aid office that, in many cases, was understaffed office and/or staffed with students who did not fully understand the complexities of college financing. 23 University of Illinois at Chicago, Financial Counselor. (July 12, 2007). 21 A new counseling program at Barnard College recently demonstrated the effectiveness of personal counseling.24 Before Barnard would certify to a private student loan lender that a student was enrolled, Barnard required students or their parents to talk to an aid counselor. The point of the conversation was to inform families of financial aid options that they may not know about before borrowing a private student loan. As a result of the counseling, private student loan volume at Barnard dropped 73 percent. The results suggest that many families taking out private student loans may not need to, or might not do so if they obtained personal assistance to help explain the issues. Personal assistance could overcome the tendency of students and parents not to revisit financial decisions they had made previously. Students explained how they would not revisit their college financing decisions after their first year. Personal counseling could help get students over the hurdle that “it’s too much work to find a new private loan.” This assistance could also assess whether the student has received the lowest cost loans possible (whether federal or private). Many colleges have used their business departments to help provide students with personal finance counseling. For example, the University of Georgia (Peer Financial Counseling), Texas Tech University (Red to Black), University of Arizona (Credit Wise Cats) and Wright State University (Wright Financial Path) each have peer counseling programs. These examples could serve as models for colleges to emulate so that the counseling burden does not fall completely on the college’s office of financial aid. Finally, empirical research highlights the effectiveness of financial literacy counseling. Empirical research has shown that “teaching financial literacy to students has measurable benefits.”25 Other research has highlighted how students believe they obtain better information about how to finance college and make personal finance decisions when it is delivered through individual counseling sessions.26 Recommendation 5: Develop college-specific loan profiles that accurately describe the student loans that students and parents have borrowed to attend each college. Recommendation Explanation: ED should develop a statistically accurate profile of the student loan lending activity that occurs at each college. To make the profile comprehensive, Congress should require lenders of private student loans to report the loan amounts, rates, and terms of these loans (by student and college) to ED (see Recommendation 6). 24 Scott Jaschik, Bucking the Tide on Private Loans, Inside Higher Ed. July 16, 2007. 25 Karen Gross, Joanne Ingham, and Richard Matasar, “Strong Pallative, But Not a Panacea: Results of an Experiment Teaching Students About Financial Literacy,” NASFAA Journal of Student Financial Aid, 2005, 7. Julia Y. Porter, W. Richard Fossey, William E. Davis, Michael F. Burnett, Janice Stuhlmann, and Patricia A. Suchy, “Students’ Perceptions of Factors that Affect College Funding Decisions” NASFAA Journal of Student Financial Aid, 2006, 1. 26 22 The profile would include statistics on the amount of student debt by entering class, the interest rates, fees, APRs, repayment amounts, loan term, and the lenders used. It also would include historical default rates for the college by the lender. ED would be required to release each college’s profile publicly within a reasonable time before the start of the next academic year. Justification: The student loan scandals uncovered by New York Attorney General Cuomo have focused on eliminating conflicts of interest between colleges and lenders and ensuring that college financial aid offices operate in the best interests of students. The use of preferred lenders and other arrangements have created real and perceived conflicts of interest. Many leading lenders have agreed to codes of conduct. A growing number of colleges have also entered into such agreements and others have made voluntary changes to eliminate even the appearance of a conflict of interest. This recommendation is aimed at eliminating conflicts of interest and creating greater accountability for, and transparency of, student borrowing at the college level. Substantial numbers of students seek individual assistance from college financial aid offices. Financial aid offices are often the only place that students, especially independent students, can turn for personal assistance. Students explained how they followed the advice of their college’s financial aid office. Despite the recent investigations by the New York Attorney General and others, students and parents continue to rely on college financial aid offices for advice about student loans. A college lending profile could shine light on any potential conflict of interest between college financial aid offices and students by highlighting the actual lending activity that has occurred for students at each college. Disclosure of rates and terms of federal and private student loans, and the borrowing patterns of students at each college, will allow college financial aid offices to set benchmarks and evaluate the borrowing of its students – and thereby their own performance in recommending loans. This added transparency will also allow college financial aid offices to develop preferred lending lists based on a lender’s actual lending practices to students at the college. Recommendation 6: Report the rates and terms of private student loans made to students by colleges to the U.S. Department of Education. Recommendation Explanation: Lenders of private student loans should report loan amounts, rates, and terms (on a student-by-student basis and college-bycollege basis) to ED. ED can use the aggregate data (stripped of personally identifiable data) to develop the college lending profiles identified in Recommendation 5. The college lending profiles would, in turn, include statistics on the amount of private student loans borrowed by entering class, the interest rates, fees, APRs, repayment amounts, loan term, and the lenders used. Access to this private student loan data for purposes other than for the college lending profile and Student Access (Recommendation 7) would be prohibited. 23 The reporting of consumer loan data to the Federal Government is not unprecedented. The Home Mortgage Disclosure Act, enacted by Congress in 1975, requires most mortgage lenders located in metropolitan areas to collect data about their housing-related lending activity, report the data annually to the government, and make the data publicly available. Initially, HMDA required reporting of the geographic location of originated and purchased home loans. In 1989, Congress expanded HMDA data to include information about denied home loan applications and the race, sex, and income of applicants and borrowers. In 2002, the Federal Reserve Board amended the HMDA regulations to require lenders to report price data for certain higher-priced home mortgage loans, and other new data. Moreover, recent revelations that lenders of private student loans price their loans based, in part, on the college that the borrower attends, also justify public scrutiny.27 Recommendation 7: Improve the National Student Loan Data System (NSLDS) Student Access and Student Aid Report to provide meaningful loan repayment information. Recommendation Explanation: Currently, the ED maintains a comprehensive database of federal student loans and grants. The National Student Loan Data System (NSLDS) receives data from schools, guaranty agencies, the Direct Loan, Pell Grant, and other ED programs. At NSLDS Student Access (a website), students can view limited information on their loans and grants. NSLDS, however, does not track private student loans. ED also uses NSLDS to list the student’s outstanding federal loans on the Student Aid Report (SAR). The list of outstanding loans is tucked away toward the end of the SAR. The SAR provides a two-sentence generic explanation of the student’s repayment obligation: Remember you are responsible for repaying all of the amounts that you borrow, plus interest. As a general rule, with an assumed interest rate of 5%, the monthly repayment amount over a ten-year period would be approximately $10.61 for every $1,000 that you borrowed. ED could improve the information that students receive through NSLDS Student Access. Students should be able to receive customized information that includes minimum monthly repayment amounts based on the actual term and interest rates, total amounts repaid, and salary ranges necessary to repay their federal and private student loans. Only authorized students should have access to this information through the NSLDS. Testimony of Barry W. Goulding, Sallie Mae, United States Senate Committee on Banking, Housing and Urban Affairs, “Paying for College: The Role of Private Student Lending,” June 6, 2007, 13. 27 24 ED also could include this information on the SAR. Moreover, the list of outstanding loans should be included in the first page of the SAR. Figure 6 contains a prototype of an improved list of outstanding student loans. Justification: Currently, students do not have one place where all of their outstanding federal and private student loans are tallied and projected payments are detailed. Students do not understand the level of income necessary to repay these loans after they graduate. When asked, several students thought it was possible to have student loan repayment amounts comprise up to 25 percent of their annual salary without causing financial hardship in other parts of their budget. Research has found that few can handle student loan payments of more than 15 percent at most.28 More important, during the college counseling sessions, college financial aid offices could direct students to this information so that they can understand their repayment obligations. This recommendation is consistent with the GAO’s finding about the usefulness to consumers of customized information disclosures that are prominently displayed. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 requires that credit card issuers include, in all cardholder billing statements, a generic warning, or “disclosure,” about the potential financial consequences of consistently making only the minimum payment due on a credit card. GAO determined that consumers found customized minimum payment information to be very useful and that consumers would prefer to receive this information in their billing statement. These consumers liked that the customized disclosures would be specific to their accounts, would change based on their transactions, and would provide them with more information than generic disclosures. GAO also found that providing such disclosures on the first page made them more meaningful to consumers.29 Content of Disclosure: Students indicated that a customized disclosure about their specific loans and actual repayment obligations would be very helpful. Students found the SAR’s current disclosure unhelpful and misleading. Most students pay more than 5 percent in interest and students must calculate their exact monthly payment without being given correct information to do so. Students suggested that had they known what their obligations would be, they would not have taken out as much debt. Instead, they would have searched for additional scholarships, worked more during college; changed their spending habits during college, or reconsidered whether to attend the same college. Sandy Baum and Saul Schwartz, “How Much Debt is Too Much?,” The College Board April 2006 (July 12, 2007). GAO, “Credit Cards, Customized Minimum Payment Disclosures Would Provide More Information to Consumers, but Impact Could Vary” GAO-06-434, April 2006. 29 28 25 26 Appendix A Phase I Focus Groups – Learning From Existing Borrowers January 30, 2007 (Boston) (27 participants) • 3 groups (current students at four-year schools, current students at two-year/trade schools, parents) February 1, 2007 (New York) (24 participants) • 3 groups (current student at 2-year/trade schools, recent graduates, parents) February 8, 2007 (Atlanta) (26 participants) • 3 groups (current students at four-year schools, recent graduates, parents) Phase I Focus Group Participant Characteristics 1. Current Students at public and private four-year colleges and universities: Students who have taken loans out in their own names, were active in the selection of the loan products, and have at least $5,000 of student loans per year of school. 2. Current students at 2 year community colleges and trade schools: Students who have taken loans out in their own names, were active in the selection of the loan products, and have at least $2,000 of student loans per year of school. 3. Parents of current students at public and private four-year colleges and universities, community colleges, and trade schools: Parents who have financed their children’s college education through educational loans in their own names (PLUS loans) or used non-student loan sources (401k, credit cards, home equity), their children may or may not have loans in their own name; parents active in the selection of the loan products. There is no dollar loan limit for these parents. 4. Recent graduates of public/private four-year colleges and universities, community colleges, and trade schools: Graduates with loans in their own name and with greater than $20,000 in loans when they graduated. Phase II Focus Groups – Testing Recommendations Among High School Students, College Students, and Parents We conducted 3 groups (current undergraduates, college-bound high school juniors and seniors, parents of college-bound juniors and seniors) at each location: May 14, 2007 (New York) (17 participants) May 23, 2007 (Chicago) (19 participants) May 24, 2007 (Los Angeles) (18 participants) Phase II Focus Group Participant Characteristics 1. Current undergraduates at four-year public and private universities, community colleges, and trade schools. 2. Current high school juniors and seniors planning to go to a four-year college or university, community college, or trade school and plan to use student loans. 3. Parents of high school juniors and seniors planning to go to a four-year college or university, community college, or trade school and plan to use student loans. A-1 B-1 Appendix B MODEL 2 COLLEGE Office of Financial Aid Address Phone February 07, 2007 0000000 Jane A. Doe 123 Main Street Anytown, ST 00000 FINANCIAL AID MEMORANDUM This financial aid award is based on the following student expense budget and estimated resources. Budget Category Tuition and Fees Room & Board Books & Supplies Personal Expenses Travel Health Insurance Budget totals Amount 34,916 9,080 950 2,500 150 880 --------48,476 Resources Parental Contribution Student Contribution Total Resources Need (Budget - Resources) Amount 670 750 --------1,420 47,056 The following financial aid is available to you for academic year 2006-07. Source: Federal Work-Study-on campus Pell Grant Fed Supplemental Ed Opp Grant Model College Scholarship Dean's Discr Grant - Start-Up Model College Health Schlp Fed Acad Competitiveness Gt Total Awards: Fall 475 1,700 1,000 19,338 400 880 375 ------24,168 Spring 475 1,700 1,000 19,338 0 0 375 ------22,888 Total 950 3,400 2,000 38,676 400 880 750 ------47,056 The following notes relate to your financial aid award: Your financial aid award has been revised to include a Federal Academic Competitiveness Grant. Please sign and return the accompanying acceptance form. Contact us if you have any questions concerning your financial aid. B-2