Paying for college is one of the few major life expenses without standardized mandatory cost disclosures. Promotional material for a credit card has to include the Schumer Box, which clearly states the card’s annual percentage rate and other key fees and terms that used to get tucked into the small print; a new car has to display the Monroney window sticker, which details the vehicle’s fuel economy, crash test and emissions data and manufacturer’s suggested retail pricing, and a mortgage lender must provide a Good Faith Estimate and HUD-1 settlement statement that itemizes the closing costs and other fees and services associated with buying a house. College financial aid award letters, in contrast, often characterize loans as reducing college costs and do not clearly distinguish loans from grants, confusing families about the real bottom-line cost. Students often do not know how much debt and interest is accumulating during enrollment, nor do they realize how much they’ll have to pay per month after they graduate or how much they’ll pay over the life of their loans.
The federal government’s new “financial aid shopping sheet” will provide families with better college cost disclosures, but it must be made mandatory. Prospective students should be able to access information linking projections of likely debt levels, salaries and unemployment rates for their preferred colleges and academic majors before choosing where to enroll. The government recently started requiring for-profit colleges to disclose this information, but there’s no reason why public and non-profit colleges shouldn’t report this information as well.
But better disclosures are not enough. The timing of the disclosures also matters. For example, students who drop out of college are four times more likely to default on their student loans than students who graduate. Yet colleges wait until just before graduation to counsel students about their repayment options and the dire consequences of default. Many students don’t know when they enroll that it is almost impossible to discharge student loans in bankruptcy proceedings, that defaulting will ruin their credit scores and thus hurt their ability to get an auto loan, mortgage or even a credit card, and that their wages can be garnished and income tax refunds intercepted until they repay the loans.
Income-based repayment is a safety net for federal student loan Most borrowers don’t know about income-based repayment, an option that first became available in 2009 and is available to those whose total federal student loan debt exceeds their annual income. People who are falling behind with their payments often do not learn about this alternative repayment plan because they feel overwhelmed by debt and start to ignore correspondence and calls from creditors. Only 2.6% of borrowers use income-based repayment, even though three or four times as many borrowers could benefit. Most borrowers don’t know that the involuntary payments under wage garnishment are higher than the monthly payments under the income-based repayment.
Earlier and more frequent debt counseling and debt disclosures—before students borrow and at least once a year during their enrollment—would increase borrower awareness of the growth in their debt burdens, methods of minimizing debt, options for repaying the debt and the consequences of defaulting on these loans. Maybe if lenders or colleges or the U.S. Department of Education were to provide undergraduate students with periodic loan statements while they are enrolled, more borrowers would finish college faster and with less debt, and fewer students would default on their loans.
Families also need the tools and skills to interpret these disclosures. Financial literacy training, including budgeting, banking, borrowing and investing, should be incorporated into high school curriculum, and a financial literacy mini-course should be required during college orientation or during the first year of college. Not only will this help students make smarter borrowing and repayment decisions, but it will help them be more successful in life by teaching them how to manage their money more effectively.