In the Nation's Interest

Higher Education—Helping Students Make Educated Borrowing Decisions

by Bob Collins April 25, 2017

During Financial Literacy Month, we all focus on helping young—and not-so-young—people make smarter decisions about spending, saving, and borrowing. This is particularly relevant for contemporary college students, the busy working adults coming back to school to complete degrees that will enable them to get better jobs and increase their earning potential. Therefore, it is surprising that so many of these students will make uneducated decisions to finance their education.

According to the New York Fed, student loan debt now surpasses $1.4 trillion, and repayment trends are shifting. In the past, delinquency rates were highest among non-degree completers, many of whom were dissatisfied with their educational experience. Now, however, there are an increasing number of degree completers with high loan balances who are unable to repay their loans on time. With college tuition increasing much faster than inflation, it’s not surprising that college graduates are having more trouble repaying their loans.

The numerous federal income-driven (IDR) and income-based (IBR) repayment plans, which offer some students a safety net, can also be costly to both borrowers and taxpayers. For borrowers, extending the life of a loan increases total interest paid, and loan forgiveness after a set number of years is a significant cost to taxpayers. Offering IDR plans after the money is lent is a solution too late – we need to be more proactive to help students make an informed decision before they decide how much to borrow. Furthermore, these IDR plans offer no incentives to reduce student borrowing or hold down tuition costs and keep institutions accountable. Arguably, IDR/IBR and Public Service Loan Forgiveness (PSLF) programs may encourage students to borrow loan maximums in the hope of loan discharge.

College is a costly business, and all of us in higher education have an obligation to work to make it more affordable. New York’s new program that provides free public college tuition for families with incomes under $100,000 is a start, but there is potential for unintended consequences. As an example, increased demand will force more selective admission criteria, reduce access to first-generation college students, and drive up costs to taxpayers with additional capital expenditures to build infrastructure.

There are some affordable options for working adults over 25 years old. These contemporary college students, who are the majority of students today, need high quality, flexible programs that will advance their careers. Moreover, college costs should not be a barrier to entry. We need to offer affordable programs that will meet their needs, and as educators, we are obligated to ensure students understand the financial implications of the way they choose to pay their college costs.

We serve these students at Western Governors University (WGU). They have some college, no degree, and prior student loan debt. In 2013, we began a simple education program called Responsible Borrowing. We work with borrowers to help them make informed decisions before and during enrollment. What is my current outstanding debt, including what I borrowed from other colleges? How much should I borrow? What will my total student loan debt be at graduation?

Rather than simply telling students how much they are eligible to borrow, we recommend they borrow only as much as they need to cover tuition. We show them various tuition payment options with a student loan scenario calculator to reflect estimated monthly payment amounts after graduation, and how long it will take to pay their student debt in full. By simply providing this information at the right point in time, just before they begin their academic year and tuition payment is due, we are enabling students to make better, more informed decisions.

This simple education program is delivering real savings: a 41% decrease in borrowing, a steadily decreasing default rate that is less than half the national average, and an average debt at graduation of $16,862 compared to $37,172 nationally.

Education for contemporary students is supposed to prepare them for better jobs and a better life. Making wise financial (borrowing) decisions will affect the quality of life for students and their families for many years to come. It is vital that students understand the consequences, short- and long-term, of their borrowing decisions. And, we need to provide better options.

Bob Collins has more than 35 years of experience in student aid administration. Collins has served as Vice President of Financial Aid at Western Governors University since 2012, and continues to be active in the state, regional, and national professional associations. He has been a member of several technical review panels for the National Center for Education Statistics and has participated on numerous negotiated rulemaking committees for the U.S. Department of Education.