Restrict Students’ Borrowing—Or Provide Better Guidance?

I came across an interesting post on the Student Lending Analytics Blog about a proposal to allow financial aid officers to prevent students from overborrowing.

Such a measure would be too extreme. For federal student loans, using present-day factors, like GPA, major and expected earnings, are helpful tools in predicting future repayment ability– but the choice should lie with the individual student. The pursuit of education is, after all, a very personal decision and at some point, students need to take responsibility for their actions. And as we all know, the past is not always a good predictor of the future (answer true, how many of you are today working in fields totally unrelated to your major?).

But, I do share the concern of the blog author, Tim Ranzetta, that borrowing limits are pushing the envelope of what’s bearable for graduates, especially as they start out in life. Ranzetta’s research showed that dependent students who borrowed the maximum amount could leave school (again, undergrad only) with $47,000 in just Perkins and Stafford; for independent students, it’s $65,000.

Recent reports that have drawn attention in the media and higher education circles insist that student borrowing is manageable, but the numbers so often cited don’t tell the whole story. According to the College Board 2009 policy brief “How Much Are College Students Borrowing?,” the median loan debt at graduation (undergrad and associate degree/certificate only), ranges from $7,000 all the way to $33,000 depending on school type. But these figures don’t include state-based loans, institutional loans, loans from friends and family, and other credit card debt accrued in college. And the report goes on to point out that even the data for private nonfederal student loans is limited, as it’s based on student interviews (no federal tracking mechanism currently exists for private loans and the institutions themselves aren’t always aware of private loans borrowed directly by the student).

As for everyone with debt, it all comes down to the personal budget. Each one of the loans mentioned above, but not included in the College Board figures, represents an additional monthly bill for the recent graduate. And for grads heading into a slumping job market, that can really add up.

That’s why it’s time to step up debt management and financial literacy counseling in the federal student loan program. Instead of restricting students’ ability to borrow, the financial aid community needs to earlier on impress upon students the true ramifications of student loan debt upon their after-school budgets. It’s our job to make the “some day in the future” aspect of student loan repayment more relevant to a student’s here and now, so that imprudent overborrowing doesn’t occur. Proactive education and engagement, not heavy-handed constraints, are the order of the day.

But I’m curious to hear other thoughts on the subject—are more extreme measures needed? Do we need to save students from themselves? Arm them with more information? Or something in between?
 

Posted by Shelley Saunders on October 22, 2009 at 02:44 PM EST

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