Do college students understand the real cost of their education? For those families going into debt to pay for college (in 2013, 69% of students left school with an average of $28,400 in student loan debt), financial literacy is an important concept to consider.
Most colleges include entrance and exit loan counseling for all students that receive federal student loans, but some colleges have gone the extra mile to ensure that students and their families really understand their individual debt picture.
For example, in 2012, Indiana University started sending annual letters to every student-borrower that estimates their total loan debt and future monthly payments to boost the students’ financial literacy. This has resulted in an 18 percent drop in borrowing by their undergraduate students. Now, the state of Indiana requires it of all colleges that accept state aid. Nebraska followed with a similar law in spring of 2016.
It is a fact that many students and their families cannot simply pay cash for a college education. So the options are to borrow money, apply for scholarships, work while in school, or choose a less expensive route to their degree. There are trade-offs if a student understands the financial obligation of student loan debt, and decides to say “no” to borrowing or decides to borrow less. For example, if a student is working extended hours, he or she may not have as much time to study.
Unfortunately, financial literacy is definitely a problem for the youngest college students. According to researchers at the Brookings Institution, over 25% of first-year college students with federal student loans didn’t know their loans came from the federal government. And, about half of those students had no idea they were going into debt to pay for college. Many students are confused, maybe because their parents handle all the financial aid details or the confusing way that student aid is packaged (scholarships, grants, loans, etc) all in one letter received by the student.
Unfortunately, students may just accept whatever aid the college offers without questioning if there are options to live less expensively and thus, borrow less. For example, could the student live at home and save the cost of room and board or choose a less expensive dorm or meal plan?
One of the greatest cost savings for undergraduates is to graduate in four years. In addition to improving financial literacy, Indiana University also encourages its students to enroll in at least 15 credit hours each semester – the number needed to graduate in four years. They also changed the financial aid process to make it easier for students to decline student loans. According to Phil Schuman, the university’s director of financial literacy, “I don’t think students actually knew they had the option to take less.”
As you prepare to attend college or send your student to college soon, make sure that you understand the full financial aid picture for each school. Doing the work now to understand student debt can save a lot of financial strain in the future.