Student Loans May Be A Must; Default Disasters Don’t Have To Happen
Student loans can be debilitating obligations.
There’s not a day that goes by, it seems when we don’t hear about skyrocketing student loan obligations. Most borrowers take out federal government loans, which now total more than $1.5 trillion.
The situation is only aggravated by borrowers who find themselves unable to pay off their loans. Many default on them, which could negatively impact their credit.
Many ideas have been bandied about to address the burdening student loan crisis. A new report suggests several common-sense ideas that have nothing to do with forgiving debt or even making college free.
Instead, it discusses financial education as being key.
It’s called “Best Practices for Financial Literacy and Education at Institutions of Higher Education.” It was released last week as part of a group that includes the U.S. Treasury Department. For the remainder of this piece, we will refer to the report as the FLEC report.
Here, we’ll highlight some of the aspects of the report. You could even start using now if you’re a student loan borrower.
Student Loans Driving Many over the Edge
The $1.5 trillion figure mentioned above is owed by 43 million individuals, according to the report. The average carried per borrower is more than $33,000.
The staggering amount has risen steadily over the years. and the effects on some borrowers have been crippling. In fact, the situation has grown so dire for some that they complain of being stressed about repaying their obligations to the point of being unable to function on their jobs.
The thought of their credit being ruined if they default is one of the biggest concerns. Not only can a bad credit report limit one’s ability to secure other financings, such as for a home or car, it can also prevent people from getting jobs.
The report notes:
People with significant student debt may feel constrained in their choice of career and where they live, refrain from starting a business, and delay starting a family and purchasing a home.
Are the rising costs of attending college and student debt are even worth it. According to the report, one in five adults who attended college believe the costs of their education exceeded the financial benefits it produced.
All this could be avoided if students knew exactly what they were getting into in the first place. The report notes how higher education institutions play an important role in our society and our economy. Why not take that a step further?
Student Loans and Higher Eds
About the report, Treasury Secretary Steven Mnuchin said:
“It is vital for our higher education institutions to offer students the resources and information they need to make financial decisions that best fit their needs and career aspirations.”
There are a series of best practices that are outlined in the report for higher education institutions to implement. Many of them are common sense practices, such as communicating the importance of graduation and major on repayment of student loans.
There are others that have more sticking power. Higher education institutions should:
- require mandatory financial literacy courses
- deploy well-trained peer educators
- integrate financial literacy into core curricula
- communicate with students about financial topics more often than during required entrance and exit counseling
When Debt Letters Are Welcomed
The report discusses debt letters, which many borrowers may not even be aware of being available. The name may be a bit off-putting, but these letters can help borrowers considerably.
Debt letters were created based on research that suggests that students do not receive or digest a sufficient amount of information regarding their student loans. These letters sum it up.
They are typically issued each year to students by their schools. They summarize what students have borrowed to date and how much they can expect to repay once they graduate, according to the report.
Unfortunately, they aren’t required under federal law to be provided, and there is no legislation in the works to do so. The report notes that 12 states have passed legislation to create mandates for student debt letters.
Half of those with debt letter mandates also require information about non-federal loans and more than half require the letters to include information about the percentage of the borrowing limit used by the student, according to the report.
Student Loan and Debt Letters
An interesting finding relates to Indiana University. When it introduced debt letters along with other financial literacy strategies in 2012, it saw the student loan volume for undergraduates decrease by 24.6 percent, or $99.2 million, according to the report.
In addition to helping students understand how much they will have to repay, debt letters can be used to encourage students to seek financial counseling and prepare for post-college financial decisions. For example, letters can compare the student’s expected monthly payment with the expected monthly salary for a person with their degree and major.
Debt letters are low-cost to deliver and can reach every student. If you’re in school or have a child who is, inquire about these letters. Understand, also, that using them with other strategies, such as one-on-one counseling, could be even more advantageous.
Other DIY Tasks
The report points out other steps that should be taken, even though they may seem trivial. For example, build a budget to set a repayment goal. Don’t wait until after you graduate either. The report notes:
Students close to graduation who are deciding among jobs and career options may need guidance to develop a budget that considers their projected salary. Creating a budget and identifying all fixed and variable expenses and discretionary spending can assist a student loan borrower with developing a realistic view of their financial situation.
Higher education institutions are encouraged to help students identify and connect with their student loan servicers.
This is another task you can do on your own. Establish a relationship with your student loan servicer and provide updated contact information to ensure that they receive timely information on your loans.
Make sure you understand the type of loans you have, and the student loan servicer for each of your loans. Also, make sure you know where to find out about how to submit payments.
The report is extensive, but it is well worth the read. You may find a link to it here.
If you want to know more about how to avoid student loan defaults, contact Debt Advisors.