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What Students Don’t Know About Student Debt Is Definitely Hurting Them

Total student loan debt in the U.S. has reached $1.4 trillion, more than what Americans owe on cars and credit cards. Federal Student Aid provides more than $150 billion in federal grants, loans, and work-study funds each year to more than 13 million students paying for college or career school. Loans and other federal and state efforts have indeed increased access to postsecondary education. But what about the challenges many face when they transition from students to borrowers in repayment? Our team of student success counselors hears their stories every day, and in this blog we’ll be sharing some common themes.

Since only about 60 percent of Americans who begin college complete a degree, many students have to make the switch from school to “the real world” without the academic qualifications they had planned to base a career on. As a nonprofit that has spent many years partnering with schools and students to support their mutual success, we see too many students who arrived at college ill-prepared to make sound money management decisions. They end up needing our services as they struggle to repay student loans they don’t fully understand or, in many cases, aren’t even aware of.

School loans are often the first debt people take on, especially for underserved students.  And yet nearly 70 percent of students have not attended personal finance classes or workshops in high school and 77 percent have not done so in college. More than 55 percent of students report that they decide on their own how much they need to borrow to pay for school.

In the millions of phone calls, emails and other contacts we make with borrowers every year, we see the disadvantages this lack of support creates as students finish attending school only to find out that the process of paying for it is just beginning. “People sometimes are shocked to learn they even have a loan,” explains Janet Sorg, director of client relations for Student Connections. “Often our counselors’ first task is to validate to students that they do in fact owe on a student loan. Students will sign their promissory note while lumping loans, grants and other financial aid into one category: ‘free’ money.”

In other cases, students may be aware of one loan but oblivious of others they have taken out. “A student could have gotten multiple loans, perhaps a direct loan, a Perkins loan and even a private loan,” says Janet. “They may think the one payment they’ve been making covers all of their debt, only to be told they have multiple servicers. These students can also be completely shocked to find they are delinquent.”

Once our counselors get borrowers over the common hurdle of simply realizing they have a student loan, the next task is to make them understand that, although defaulting on a loan has serious consequences, there are viable ways to become current, even on loans with seemingly insurmountable balances. Borrowers are routinely and pleasantly surprised to learn about options such as unemployment deferment and income-driven repayment plans (IDRs). We often can bring them current on the phone, but sometimes additional action, such as completing and returning forms, are required of the borrower. We suggest forbearance, which allows the balance to increase through interest charges, only as a last resort, usually as a short-term measure to quickly bring a loan current so that the borrower can then qualify for an income-driven plan.

Our student success counselors relish every opportunity to help borrowers find the right path forward for them, one that preserves their financial future while keeping their student loan current, thereby avoiding costly financial penalties, credit damage, and other repercussions, such as the inability to use federal aid to help finance a return to school.

Here’s an example from a recent call one of our counselors had with a borrower. The borrower wanted to return to school, but had been injured at work. Unable to work and pay on the loan, the borrower, who also was supporting a family, was heading rapidly toward default. Our counselor educated the borrower about IDR options and helped with the completion of an in-school deferment, first using a forbearance to restore the loan to current status since the borrower could not make immediate payments. This allowed the borrower to finalize the IDR and get on track to return to school under an in-school deferment.

As happens so often during our counseling, the call ended with the borrower tearfully expressing relief. A quote from the caller is now on our inspirational wall of fame: “Thank you so much! I never expected this to be so easy and have so much help!! God bless you and thank you so much! You are doing such a wonderful thing.”

As much as we delight in being able to help students get back on the path to success, we’d rather they never experience a detour. Based on the repeated stories we hear from students and schools around the country, here are some reminders about what schools can do to be more proactive in supporting repayment success and avoiding loan defaults:

  • Financial literacy, early and often: The earlier students can learn about debt-to-income ratio, the net price of college, salary projections, employment prospects, loan terms, financing college with a minimum of debt, and how all of these variables fit together to chart an individual’s financial wellness, the better. Anything schools can do to facilitate this, from traditional classroom engagement to interactive “virtual” platforms, will be helpful.
  • Grace counseling: While not as proactive as financial literacy resources, grace counseling is still much more preventative than trying to catch up to borrowers who have already entered delinquency. You can recap loan terms, encourage students without a degree to return to school, and generally reduce confusion down the road by simply reaching out to students who have recently left your institution. Considering how many students tell us they are surprised to learn they have any debt at all, at the very least you’ll be catching students up in the student-loan learning curve.
  • Effective exit counseling: Even though there is a requirement to provide this to any recipient of federal loans, from the student stories we’ve shared, it’s clear this information doesn’t always sink in. If nothing else, exit counseling can establish your school as a credible source of loan information going forward, lessening the chance that students will ignore outreach later on, especially during a delinquency. This is critical, because another thing we often hear borrowers say (about unsuccessful attempts by their school to contact them) is “I couldn’t pay them so I wasn’t going to talk to them.”

We know time is a scarce resource for both students and schools. But a little more investment in being proactive can save a lot of resources – and heartache – later on. In the meantime, our counselors will remain ready to help students stay on – or return to – the road to success.

Do you have thoughts on the nonacademic knowledge gap that challenges many students?

George CovinoGeorge Covino is a contributor to the Student Connections blog