Congress is in the initial stages of rewriting federal higher education policy.
Last week, Sen. Lamar Alexander (R-Tenn.), the chairman of the upper chamber’s Health, Education, Labor, and Pensions Committee, outlined his reform agenda, which includes a measure that could force colleges to assume some of the financial risk for their students’ loans.
Compelling colleges to have some “skin in the game” may help reduce default rates. Such an approach may also encourage post-secondary institutions to make sure that students understand the implications of the debt they’re taking on.
{mosads}Most student borrowers do not — even though they’re required to undergo federally sanctioned student-loan exit counseling.
That’s a problem the feds now have the opportunity to fix. They can do so by improving the efficacy and quality of their student-loan counseling efforts.
The time is ripe for an overhaul of our nation’s system of financing college. Federal student-loan debt outstanding is now north of $1 trillion. Seventy percent of bachelor’s degree recipients in the class of 2014 graduated with student loan debt averaging nearly $33,000.
Default rates exceed 13 percent. The U.S. Department of Education reports that 650,000 student borrowers who began their official repayment period in the 2011 fiscal year defaulted on their loan at some point in the next three years.
Almost one-third of students with loans end up dropping out of school. So they leave school with debt — but without a degree to show for it.
This group of non-completers also defaults at a significantly higher rate — three times as often as those who graduate.
Many of these students had no idea what they were getting themselves into. Indeed, a recent Federal Reserve Bank of New York survey found widespread ignorance among borrowers about the consequences of student loan default.
Youthful student-loan indiscretions could delay or even prevent borrowers from achieving other personal financial goals, like homeownership.
Government, universities, and private credit agencies all offer counseling services for borrowers who are having difficulties with repayment. But by the time many people seek help, their financial situation is already out of control.
The federal government requires borrowers to take an online course before they leave school to educate them about their student loan obligations. But with double-digit default rates the norm, the current counseling program clearly isn’t working.
The solution? Better financial education for student loan borrowers — before they even start repaying their loans.
A new study conducted by TG, the nonprofit organization I lead, and the National Association of Student Financial Aid Administrators has identified two key problems with the existing student counseling program.
First, students find the course irrelevant and unhelpful. Student loan borrowers generally lack a “sense of urgency and importance necessary to engender sustained focus” during the exit counseling module.
The second problem is perhaps indicative of the first — some two-thirds of students report that the course is too long, contains too much information, and is too densely worded. As one student said, “I read all of that text because it was there, but I’m not really sure what the point was. I just want to know how to pay back my loans and they’re having me read this wall of text that isn’t going to help me do that.”
Federal officials should replace the one-size-fits-all status quo with counseling sessions tailored to individual borrowers’ unique financial situations. Technology, along with in-person discussion, can do just that — and will yield better results.
When a student is provided with his student loan balance at the beginning of his counseling session, his focus sharpens immediately. Said one student who completed a trial counseling session with this individualized approach, “Wow, that is a lot more than I thought it was going to be. So I guess I actually have to pay attention now.”
Fortunately, the Department of Education seems to be listening to this feedback from students. Federal officials have signaled that they’ll revise the exit counseling program by adopting some of the recommendations in the TG-NASFAA study.
A powerful tool for preventing student-loan defaults is better, more relevant information. Lawmakers should make revamping the existing federal loan counseling program a priority. Colleges should aid their efforts by implementing effective loan counseling programs of their own. Doing so will pay big dividends — for student loan borrowers and taxpayers alike.
Patterson is president and CEO of TG (www.tg.org).