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College students don’t really understand their student loans. This comes from a report conducted by the National Economic Research Associates (NERA), which recommends providing borrowers with more information to understand their student loans. Is this really the best solution, however? Isn’t the problem the debt itself?
According to the study by NERA Economic Consulting:
About 65 percent misunderstood or were surprised by aspects of their student loans or the student loan process. About two-thirds of private loan borrowers, including those who took out both private and federal loans, said that they did not understand the major differences between their private and federal options.
The organization indicates that many respondents didn’t understand interest rates, how long it would take to pay off their loans, or what repayment options were available.
Well right, why should they? They’re kids. Does it makes sense to expect 18-year-olds, the sort of people who get excited about procuring a 12-pack of Natural Ice, to have a really sophisticated understanding of the ever-changing payment option and the differences between the benefits and protections for student loans provided by the federal government and those provided by private banks (especially considering that until recently the federal loans were actually distributed through private banks)?
This is the problem with a college financing system underwritten by student debt. Loan terms are often too complicated for adults to understand. How can we ever hope to make this system universally understood by children?
NERA recommends things like “bolster and enforce the requirement that schools provide clearer guidance as to the differences between private and federal loans, and the terms for each” and “include better guidance in loan entrance counseling.” NERA says that policy should “require loan documents to be understandable and standardized” and “provide more robust information to high-dollar borrowers with federal loans that describe their income-sensitive repayment options.”
Good luck with that.
None of these things are likely to be terribly effective since they essentially amount to more forms to read and more research to do.
It’s true that college students often have a hard time understanding their loans, but that’s because debt agreements are inherently complicated. Is the solution really to try and make the financial forms easier to understand?
The real problem here isn’t the forms students can’t understand, but what those forms represent. The average college graduate now owes more than $25,000 upon graduation. They just have too much debt.
So much of this discussion of student loan burdens ends up focusing on the poor understanding students have about their debt situation. But if students understood their debt, they wouldn’t be much better off.
Let’s be honest. A serious look at this situation would indicate that the solution here isn’t more information; it’s just less debt.
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Sgt. Gym Bunny on March 23, 2012 3:17 PM:
Agreed. And couple it with the fact that there isn't really much precedent to guide new students/graduates through the process of taking out, essentially, a mini-mortgage. Taking out student loans now isn't like taking out student loans 20 or 30 years ago--hardly even 10 years ago. My older brothers went to college nearly 10 years before me, and the gulf between our debt loads couldn't be wider. The "Elders" can hardly relate to the debt load that students are graduating with nowadays.
For example, I was at a restaurant with a friend who was significantly older than me. Our waitress was still in undergrad and though she once considered med school, she was rethinking because of the amount of student debt she already owed (attending a state college, at that) and was concerned about taking on even more. While I could easily understand her concerns, my friend's response to her was: She shouldn't worry about the debt, the degree will pay for itself. And maybe it will.
So it's not so much students don't understand their debt as it is those-in-the-know don't understand the burden of gargantuan debt. Really, who thinks its okay for an 18 year old to assume $25,000 worth of debt BEFORE they even get a real job? A debt load like that (should) typically happen much later in life, but many students are now starting their adult lives "in the hole" by tens of thousands of dollars. And I do believe that front loading of debt alters how graduates decide on their future--where to work, when to go to grad school, whether to get married/start a family/buy a house, how much to invest in their savings/retirement. This is unprecedented.