Introduction

In the 2015-16 academic year, more than 8.5 million undergraduate and graduate students borrowed Federal Direct Loans and another 1.2 million individuals borrowed Federal PLUS Loans. Among Direct Loan borrowers, the average annual amount borrowed in 2015 was $6,610 for undergraduates and $20,170 for graduate students. The average PLUS Loan was $15,250 for undergraduates and $23,490 for graduate students.² Among individuals with undergraduate loans as of June 2015, 42 percent owed less than $10,000 and only 10 percent owed more than $40,000. Conversely, among individuals with graduate loans, 43 percent owe more than $40,000.³

Student loans are unique compared to most other debt products for several reasons. With most other debt products, lenders underwrite loans based on a calculation of the borrower's likelihood of repayment. However, to ensure access to higher education, most federal student loans are originated without regard to the borrower's creditworthiness.⁴ Indeed, the default and delinquency rates for student loans are much greater than those of other consumer products. The 90-plus-day delinquency rate for student loans in 2016:Q2 was just over 11 percent.⁵ This compares unfavorably to rates of under 2 percent for mortgages and home equity lines of credit, 3.5 percent for auto loans, and 7.2 percent for credit cards.⁶ For certain groups, including students at for-profit institutions and those who do not complete their degrees, non-payment rates are often higher.

In addition, with most credit products, the loan terms establish the borrower's monthly payments and length of repayment. Repayment of student loans, however, is determined by a complex list of repayment options from which borrowers must choose, the advantages of which are dependent on future outcomes, such as expected income, that the student may not predict accurately. Students with multiple loans may also need to interact with several different lenders and servicers.

For many students, their investment in higher education will be the largest they will have made to this point in their lives. The consequences of their financial decisions will follow them well after graduation as they attempt to borrow to buy a car or home.⁷ Financial aid administrators and counselors play an important part in helping students and their families make the financial choices that are best for them. However, an extensive body of research indicates that existing counseling programs often do not lead borrowers to make financial decisions that are in their best interest.⁸

Background on Student Loan Counseling

All students borrowing Federal Direct Loans must complete entrance counseling before the loan's first disbursement, as well as exit counseling when they graduate, leave school, or drop below half-time enrollment.⁹ Counseling requirements have been in place for the Federal Direct Loan program since its creation in 1992. Schools have some discretion in determining the mechanism for delivering the required counseling, but Department of Education regulations establish minimum elements that must be addressed by the school's counseling program, including

• emphasizing the importance of loan repayment;
• describing the consequences of default;
• explaining the use of the Master Promissory Note; and
• stressing that repayment is required regardless of educational outcome or subsequent employability.¹⁰

Schools may deliver the required counseling in person, by audiovisual presentation, or by interactive electronic means, but in all cases an individual with expertise in the federal student aid programs must be made available to students if they have questions. Similarly, exit counseling involves required elements and may be delivered in person, online, or, in some cases, via mail.

Though schools are permitted to develop their own counseling programs that meet the statutory and regulatory requirements, most schools opt to use the free online counseling program provided by the Department of Education (see https://studentloans.gov/myDirectLoan/entranceCounseling.action?execution=e1s1). Despite satisfying the regulatory requirements, the department's counseling tool has been criticized for its poor design, overwhelming number of statutory topics covered, and lack of personalization.¹¹ Many colleges have developed supplemental counseling programs, but federal law prevents schools from requiring, as a condition of loan disbursement, any other counseling programs aside from entrance and exit counseling.¹² As a result, even highly effective programs tend to be underutilized.¹³

Importantly, in August of 2016, the Department of Education announced a pilot program to test the effectiveness of more flexible loan counseling policies for federal student loan programs. The experiment will allow colleges to require, as a condition of receiving Direct Loan funds, loan counseling beyond the required one-time entrance and exit counseling. Schools will randomly assign students into either the mandatory entrance and exit counseling usually handled through the online tool or additional third-party or institutionally developed counseling that meets minimum content requirements. The experiment will test whether requiring additional loan counseling is effective in boosting academic outcomes and helping students manage their debt.

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Federal Student Aid Entrance Counseling Tool

The Department of Education's online entrance counseling tool has five sections covering more than 20 topics. The opening section, called "Understanding Your Loans," covers basic terms associated with loans, as well as loan types, characteristics, and limits (figure 1). Subsequent sections of the entrance counseling tool each cover a host of topics, such as budgeting, managing loan disbursements, estimating future earnings and obligations, understanding repayment plans, working with servicers, avoiding default, paying taxes, and using credit--including credit cards--responsibly. Further, nearly all topics covered include links with more details and more-robust explanations.

The instructions from the Department of Education note that most people will complete their entrance counseling session in 20 to 30 minutes. However, students are told that they must complete the counseling in a single session and cannot save partial progress and return at a later time. As a result, though the tool contains a wealth of information, students budgeting no more than 30 minutes for this exercise will not have enough time to take advantage of everything the tool offers. Furthermore, retention of the material can be a significant challenge.

The entrance counseling tool is linked to the National Student Loan Data System, and the opening section requires students to log in to display their specific loan information (including federal student loan balance) from that system. However, in most cases the student will be completing entrance counseling before actually receiving federal loans so will not benefit from having access to personalized information.

The budgeting tool prompts students to enter additional loan balances (e.g., from other federal or private loans) for what they expect to owe at the time of graduation as well as their anticipated income post-graduation. However, students may struggle to make such estimates with much accuracy, reducing the utility of the tool.

In the first section of the entrance counseling--"Understand Your Loans"--there are multiple highlighted boxes with headings labeled "Did you know?", "Important!", and "Remember!". Along with convenient scroll-over definitions, there are numerous links, such as to College Navigator (which provides cost estimates for schools) and to grants and scholarships information. However, with so much information presented, it may be difficult for users to prioritize what material they read and to focus on the information without getting distracted.

The second section of the entrance counseling tool--"Manage Your Spending"--is designed to enable a student to develop a personal budget and use credit prudently. However, a student with time constraints is unlikely to use the counseling tool for this. Near the bottom of this section are links to two informative two-minute videos discussing budgeting and borrowing. There is guidance in one of the videos informing students that there are online apps that can assist them with budgeting, yet there is no mention of the names of some of these apps.

Figure 2 displays part of the tool's third section, "Plan To Repay." To complete the calculations, students are advised to research career salaries on a Bureau of Labor Statistics website and income tax withholding allowances on an Internal Revenue Service website. The tool allows the student to compare nine different repayment plan payouts. However, students may not be able to accurately estimate their career earnings projections or their college indebtedness. This screen also has several highlighted boxes (these are labeled "Remember!") as well as an informative video on repayment, which is placed at the very bottom.

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Literature Review

Previous research has found that even after completing loan counseling, many students do not understand basic information about their loans, such as interest rate and terms of repayment, and many underestimate the amount that they owe.¹⁴ In another survey, a majority of students reported being surprised by aspects of their student loans and 40 percent of respondents did not recall ever receiving exit counseling.¹⁵ Though students in another focus group indicated that they understood that they should only borrow what they needed, they also did not consider cost to be the primary factor in deciding what school to attend.¹⁶

Additional research has found that the efficacy of the Department of Education's online counseling is limited by many flaws involving design, content, and delivery.¹⁷ Many of these problems cannot be fixed without statutory changes. Scholars have argued that reducing the complexity of the financial aid process--from completing the Free Application for Student Financial Aid (FAFSA) to repayment--would allow students to make better financial choices.¹⁸ Researchers have experimented with a variety of interventions intended to improve the timeliness, accessibility, and relevance of financial aid information. These have included text messaging, individualized letters, and alternative online counseling programs.¹⁹ Impacts have varied depending on the designs of the interventions; however, they have raised important questions about scalability as well as unintended consequences. For example, some interventions have been shown to reduce borrowing, but borrowing less is not always in the best interest of the student.

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References

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