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IU students get more information, borrow less

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A simple letter from Indiana University led its students to reduce borrowing by far more than the national average.

Amid the furor over the $1.2 trillion in U.S. student debt, the seven-campus system decided to tell students annually before they take out loans for the next year what their monthly payment would be after graduation.

Federal undergraduate Stafford loan disbursements at the public university dropped 11 percent, or $31 million, in the nine months that ended March 31 from a year earlier, according to Education Department data. That’s more than fivefold the 2 percent decline in outlays to four-year public schools nationally.

“We are having more contact with the student where they can say ‘I don’t want this,’ or ‘I want less,’” said Jim Kennedy, associate vice president and director of financial aid at the Indiana system. “If they know at all times their debt, and the repayment, it helps with a lot of planning.”

Studies have shown that many students, some as young at 17 when they first borrow, fail to understand loan terms and find themselves in financial straits when they are expected to begin repaying years later. A Federal Reserve Bank of New York report last month found that fewer than half of survey respondents with student debt had high “loan literacy.” Federal law requires colleges to provide counseling to borrowers only at the beginning and end of their studies.

Natalie Cahill, 22, who is about to start her final year in nursing at Indiana’s flagship Bloomington campus, said that after receiving her debt letter she decided to search for more scholarships.

Loan ‘perspective’

“When you take out loans for the year, you just see a smaller number than the grand total,” Cahill said. “Seeing the letter definitely put things into perspective.”

Cahill, who said she has taken out about $22,600, plans to borrow less for this year and will use earnings from a summer hospital job to help cover costs.

The level of outstanding education debt in the U.S. surpassed that of credit card debt four years ago. The most recent federal default rate, for the first three years that students are required to make payments, is 14.7 percent. That compares with 5.4 percent a decade ago, when the rate was measured over two years.

Rising default rates at Indiana also sounded the alarms among the university’s leaders, Kennedy said. The most recent rate for Bloomington for students required to start repayment in 2010 was 6.4 percent, up from 3.4 percent a year earlier, according to Education Department data.

Debt literacy

The letters, which Indiana began sending in the 2012-2013 academic year, are part of an effort to expand students’ financial-aid literacy. The schools, which have a combined 95,000 undergraduates, also started a personal finance course, peer-to-peer advising and added more information to the website. The letters are sent out mostly by e-mail before students take loans for the next year, Kennedy said.

“I’m not surprised it drives down the borrowing once you know the consequences,” Kennedy said.

Undergraduate borrowing at Indiana through the Stafford program, the most popular federal loan product, dropped to $249 million in the nine months through March from $279.6 million a year earlier, according to Education Department data.

‘Eye opening’

Seeing the cumulative amount of debt he’s acquired made Rigo Hernandez hesitant to borrow more. The 21-year-old chemistry major at Bloomington said he’s cutting expenses, avoiding purchases such as a new mobile phone, and contributing more to tuition from his summer job. He’s taken out $5,535, and would pay $2,091 more in interest under a 10-year term, according to his letter.

“When I saw the grand total, it was eye opening as to how much I borrowed and eventually I’ll have to pay that,” Hernandez said.

By the 2012-2013 school year, all seven campuses also began requiring that returning students confirm they want to take out loans on their school’s website, rather than just passively by filling out an online federal form for student financial aid. Indiana’s undergraduate Stafford loan disbursements dropped 8 percent that year.

“We added more stopping points in the process,” Kennedy said. Students “have to step back and really understand how much loan debt they’re taking on.”

Enrollment constant

Indiana’s loan volume dropped even as enrollment and financial-aid needs remained constant, Kennedy said. Tuition and fees in Bloomington increased 1.8 percent for in-state students and 2.8 percent for those from outside Indiana.

Declining enrollment is partly behind the 2-percent drop in borrowing nationally, according to Ben Miller, a senior policy analyst at the New America Foundation in Washington who analyzed Education Department loan data.

Undergraduate Stafford borrowing at Purdue University, a separate public school in Indiana, declined by 12 percent in the first three quarters on its main campus in West Lafayette, according to Education Department data. The campus also added financial-literacy programs, including small-group meetings and online scavenger hunts about loans where students can win $50 gift cards to Amazon.com.

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  • Purdue?
    if Purdue saved students 12%, and IU saved students 11%, why is the story focused on IU?
  • A step forward should be applauded, not criticized
    PJ, you're missing the point. Kids are going to take these loans out regardless of whether you think they are "smart enough" or not. Providing them with more information upfront that they may not otherwise have thought to obtain is unquestionably a positive for everyone involved (except, of course, for those who bilk naive kids). This should not be criticized, but applauded. As for me, I did not sign any paperwork for my loans. I filed a FAFSA every year, and the loans automatically showed up each semester when my bursar bill became available. I did nothing more than login to my bursar account, click the "accept" button, and wah lah, I had another semester and another loan. I did have a good estimate of what my total degree would cost, so I wasn't too concerned with my loans as long as it wasn't an exorbitant amount of interest. But there are many kids who just don't happen to think about it, or at least, they think they absolutely must get a degree so that it just doesn't matter what the amounts are (it's not a matter of them not being "smart enough" to know how a loan works, it's often a matter of making the information more convenient for them to obtain). And when I got close to being done, it took several hours (at least an evening or two) to track down the information and figure out just how many loans I had and what the terms of each were. It literally takes next to nothing for the lender or the school to simply give the student the monthly amount they will owe ahead of time. That is a great idea. Going forward I am hoping that they will also start giving the students an estimate of the market value of each degree. I'm sure you think that this would be something else with which they should be "smart enough" to figure out, but again, it's not a matter of being smart enough, it's a matter of making the information convenient, and making them aware in the first place. There are so many kids going to college who think any degree is a must, and just don't think about the value it will provide to them after graduation compared to other degrees they could have gotten. Regardless, these are positive steps, and should be applauded, not criticized.
  • Re: Fishers Gal & Adam
    Wow, I just don't know how people can't understand and find it so difficult... First, when you sign the paperwork to get the loans, you get the information on who is servicing the loan, what type of loan it is (subsidized or unsubsidized)and when your payments will have to start (typically 6 months after graduation). If you don't get this information, then why are you signing the paperwork??? I have never had any issues figure out how much I owe. How many different lenders are you all using!?!? For federal loans it was quite simple, dlservicer.ed.gov. In the past couple of years, the federal government sold my loan servicing contract to Mohela. Their website is just as easy. Log in and your information is there. It even has the loans broken out in subsidized vs unsubsidized. And you don't have to be a math wiz to figure out compound interest. Back in the dark ages before Google, yes, it was difficult. But now, they have a plethora of calculators that will tell you exactly what you'll owe. My belief is, if you're not smart enough to understand how a loan works, you shouldn't be taking the loan out to begin with.
    • I agree with Adam
      It is difficult for students to keep track of what they're borrowing, which loans (if any) have deferred interest, and which loans are accruing interest while the student is enrolled. It's also a little-known fact that students CAN pay the interest on their loans as it accrues, therefore reducing the amount they will need to repay. If a student doesn't pay on the interest as it accrues, it will be capitalized into the loan when they begin repayment, so the borrower ends up paying interest on the interest. It is extremely difficult to find out how much the interest is and how to pay on it while enrolled. Too bad the government hides that information so they can make even more money on the backs of college students. I do applaud Indiana and Purdue for making students more aware of their indebtedness while they are in school. It's a huge step in helping students be more aware of what their obligations will be.
    • Purdue
      Perhaps the Purdue spokesperson didn't return calls promptly so they didn't make the story?
    • Re: Educations of College Students
      PJ, it's not a matter of how smart college students are, it's a matter of making information more easily accessible and raising awareness. Furthermore, it would be no surprise to me that the average incoming freshman isn't familiar with how to calculate compound interest to arrive at how much their monthly payment will be. Highschool students are taught calculus, chemistry, physics, etc... not personal finance. I had no knowledge of how loans were calculated until I began my business and economics courses. Additionally, it's not an easy matter to find your actual total loan balances. Having paid for my master's with federal loans, I can say that it was an inconvenient and time consuming process just to find my total loan balance, let alone which loans started when and when the interest starts accruing. I am a business econ undergrad and masters in accounting, and I found the process difficult. Making this more transparent and easier to understand for all students is a wonderful step forward.
    • Last paragraph?
      So it turns out both IU and Purdue and had drops over 10%, but the headline and story, until the final paragraph, is all IU? Interesting.
    • Education of College Students
      I find it incredibly sad that these college students need to have this information spoon fed to them. If you're smart enough to be accepted to college, you should be smart enough to understand that you have to pay back a loan and what that will cost you in the future.

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