How this college is trying to get students to borrow less
Could curbing the nation’s student debt problem be as easy as telling students exactly how much they’re borrowing? One university is becoming a testing ground for that question.
Beginning in the 2012-2013 academic year, Indiana University began sending students an annual letter telling them how much to expect to pay each month to cover their student loans once they graduate. The idea is that if students have a clearer sense of how their borrowing will affect them post-college, they’ll make smarter choices, such as only taking out loans for necessary expenses like tuition and trying to find other ways to cover the rest.
Financial aid award letters, the documents schools send to students starting in mid-April outlining their financial aid awards, are notoriously confusing. Some schools aren’t clear about how much they’re offering a student in “free money,” such as grants or scholarships, and how much of their “award” is actually a loan they’ll eventually have to pay back. Many students and families also may not realize that they don’t have to accept the full amount of the loans offered by the school.
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The Consumer Financial Protection Bureau and the Department of Education partnered a few years ago to develop a financial aid shopping sheet that schools could send to students to clear up any confusion about their awards. As of April 2014, more than 2,000 schools were using the document.
IU’s letter offers another antidote to the confusion students experience when dealing with financial aid. The letter — combined with financial literacy initiatives, campaigns encouraging students to finish school in four years — and other efforts have reduced undergraduate borrowing at the school by 16%, or $ 44 million over the past two years, according to IU data. The university’s programs to reduce student debt are the subject of several studies, so we may soon get a sense of which pieces of the program are most effective at helping students manage their debt.
MarketWatch sat down with Jim Kennedy, IU’s director of financial aid, and Phil Schuman, the school’s director of financial literacy, to talk about the program and student borrowing more broadly. The interview below was edited for clarity and style:
MarketWatch: What were some of the major sources of confusion for students and recent graduates that pushed you to come up with this plan?
Jim Kennedy: The biggest piece that really got us going was when we found out from talking to students how they didn’t know how much debt they had when they left the university. We thought, “what can we do differently?” And that’s how we got the idea for the debt letter.
I don’t think there’s anything wrong with student loan debt, it’s useful to finance your education, we just don’t want excessive debt. We want to make sure it’s reasonable when they leave.
MW: How did you come up with the idea for all of the different elements of this program to reduce borrowing?
JK: We realized through our leadership that we couldn’t just do it in financial aid, it really had different components to it. It’s really financial literacy, the financial aid office piece of it, and really how we can better serve students to get done in the least amount of time?
There was always a group of people that graduated in four years and for us, our out of state students do pretty well graduating in four years. But there was some slippage with people saying “maybe I’ll go five years.” You don’t want to do that especially if you’re on financial aid because you want to minimize the amount of debt you’re going to have.
Phil Schuman: We’re responsible for helping students make more informed decisions when it comes to costs at college. We’re trying to help students navigate their day-to-day college lives and trying to help them make important financial decisions so that when they do see these numbers that are coming out of the debt letters they understand that “hey I don’t need all of this money. If I’m making smarter decisions, I can borrow less.”
That tandem (with the financial aid office) really puts us in a great place.