helping families finance college

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HHeellppiinnggFFaammiilliieessFFiinnaanncceeCCoolllleeggee::

Improved Student Loan Disclosures and

Counseling

A Report By:

Consumers Union

Supported By:

The Pew Charitable Trusts

July 2007


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i

Acknowledgements

The primary author of this report is Michael Wroblewski, Project Director

Consumer Education and Outreach at Consumers Union. In addition, many

members of Consumers Unions staff provided editorial support and advice,

including Chuck Bell, Ellen Bloom, Luke Bogart, Sambhavi Cheemalapati, Gail

Hillebrand, Jeannine Kenney, and Brenda Praga. The author also would like to

give heartfelt thanks to Elena Falcone and Betsy Imholz for their strategic

guidance and editorial support.

The author also would like to thank those who contributed advice, editorial

support, and technical guidance, including Lauren Asher, Edie Irons, and Robert

Shireman of The Institute of College Access and Success (TICAS); Tobi Walker

and Pauline Abernathy of The Pew Charitable Trusts; Deanne Loonin, Lauren

Saunders, and Margot Saunders of the National Consumer Law Center; Sean

Callaway, Pace University; Kim Clark, U.S. News and World Report; Allison

Cohen, PeopleTalk; Nancy Coolidge, The University of California; Tally Hart,

Ohio State University; Mark Kantrowitz, Publisher, FinAid.org; and Lewis

Mandell, SUNY Buffalo School of Management.

Consumers Union also would like to thank The Pew Charitable Trusts for the

funding of this project. The Pew Charitable Trusts (www.pewtrusts.org) serves

the public interest by providing information, advancing policy solutions, and

supporting civic life.

Consumers Union (CU) is an expert, independent, nonprofit organization, whose

mission is to work for a fair, just, and safe marketplace for all consumers. CU

publishes Consumer Reportsand ConsumerReports.orgin addition to two

newsletters, Consumer Reports on Healthand Consumer Reports Money

Adviser. Since its founding in 1936, Consumers Union has derived its income

solely from the sale of these and other publications and services, and fromnoncommercial contributions, grants, and fees. Consumers Union's publications

carry no advertising and receive no commercial support.

CUs Consumer Education and Outreach program works to deliver effective

consumer education in two ways: by raising consumer understanding and by

reducing the complexity of information needed to make marketplace decisions.

Our approach operates through intermediaries that directly serve consumers,

both on the powerful supply-side and the targeted demand-side of themarketplace.

The author is responsible for any factual errors. The views expressed in this

report do not necessarily reflect the views of those who provided editorial review.


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Table of Contents

Execut ive Summary .....................................................................i ii

Summary of Recommendations...................................................v

Introduction ...................................................................................1

Methodology ..................................................................................2

Summary of Learning from Students and Parents Who Have

Navigated the Student Loan Process ..........................................31. Cost of Higher Education ..............................................................................3

2. General Information Sources on How to Pay for College.............................4

3. Specific Information Sources about Student Loans......................................6

A. Mandatory Federal Student Loan Counseling ........................................7

B. The College Financial Aid Office.............................................................8C. Preferred Lending Lists ...........................................................................9

4. Funding Sources Used .................................................................................9

5. Understanding Repayment Obligations ......................................................10

Implications and Recommendations .........................................12Recommendation 1: Emphasize early and often the comparative costs of

different college funding sources and the need to shop around for federal

and private student loans. ........................................................................ 12

Recommendation 2: Standardize key components of the college financial aidaward letter............................................................................................... 14

Recommendation 3: Provide borrowers plain English disclosure of rates and

terms about private educational loans when the borrower receives loan

approval. ................................................................................................... 18

Recommendation 4: Require student loan borrowers to participate in annual

online financial literacy counseling prior to loan disbursements. ............. 21

Recommendation 5: Develop college-specific loan profiles that accurately

describe the student loans that students and parents have borrowed to

attend each college. ................................................................................. 22

Recommendation 6: Report the rates and terms of private educational loans

made to students by colleges to the U.S. Department of Education........ 23

Recommendation 7: Improve the National Student Loan Data System

(NSLDS) Student Access and Student Aid Report to provide meaningful

loan repayment information. ..................................................................... 24

Appendix A ................................................................................ A-1

Appendix B ................................................................................ B-1


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Executive Summary

The cost of a college education has skyrocketed in the last decade. Tuition,

fees, room, and board (in current dollars) have increased at four-year public

universities by over 70 percent and at four-year private universities by over 50

percent.1 Full-time students who borrow to finance four years of college, on

average, owe about $20,000at graduation.2 Families turn most often to college

financial aid offices to help them navigate the complex college financing process.

Yet, investigations by the New York Attorney General Andrew M. Cuomo and the

U.S. Senate Committee on Health, Education, Labor and Pensions have

uncovered evidence that financial aid offices at a few schools around the country

have taken kickbacks from lenders. As a result, they may have recommended

lenders that are not in students best interests.

Families are confused by the college funding process. With three federal loan

types (each with different rates, fees, and terms) and unlimited direct-to-

consumer marketing of private student loans, its not surprising that students and

parents make uninformed decisions that cost them more than necessary.3

Consumers (especially students without parental support and parents whose first

child is headed to college) lack readily accessible and understandable

information about the cost of a college education. They also lack unbiased,

expert advice on the best way to borrow money to finance their education.

Indeed, nearly 50 percent of undergraduate private student loan borrowers fail to

exhaust their low-cost federal student loans to finance their college education.4

Currently, colleges, high schools, non-profit organizations, lenders, and the U.S.

Department of Education (ED) use a scatter-shot approach some successful

and some unsuccessful to educate and advise families about how to finance a

college education. This approach misses opportunities to educate families and

creates information roadblocks that prevent them from making informedborrowing decisions.

1The College Board, Trends in College Pricing 2006, 11 (Table 4b), (July 12,2007).

2The College Board, Trends in Student Aid 2006, 12 (Figure 4a), (July 12, 2007).

3 For a discussion of the three types of federal student loans (Perkins, Stafford, andPLUS) see Adam Stoll, Congressional Research Service, CRS Report for Congress, The

Administration of the Federal Family Education Loan and William D. Ford Direct LoanPrograms: Background and Provisions, September 29, 2006. For a discussion of thesignificant differences between federal and private loans see The Institute of HigherEducation Policy, The Future of Private Loans: Who is Borrowing and Why?, December2006, 5-11.

4Catherine A. Wegmann, Alisa F. Cunningham, and Jamie P. Merisotis, The Institute forHigher Education Policy, Private Loans and Choice in Financing Higher Education, July2003, 71.


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These findings are supported by recent economic research: complex and

confusing information disclosures can lead consumers to make less than optimal

decisions, especially for complex financing decisions such as consumer

mortgages, and retirement savings and investments.

Consumers Union (CU) undertook original qualitative consumer research in five

major metropolitan areas with over 130 students and parents to develop practicalpolicy recommendations to improve student loan counseling and to enhance

student loan information disclosures. CUs research focused on the student loan

information needs and experiences of high school juniors and seniors, current

undergraduates, recent graduates, parents of high school juniors and seniors,

and parents of current undergraduate students.

We identified several critical pieces of information that the federal government,

colleges, lenders, and others can provide to families so that they can make

informed choices about how to pay for college,5including:

Communicating the annual cost that students and parents will have to pay to

attend college; Advising on how to minimize the cost and total amount of student loans by

exhausting federal loans before turning to private student loans;

Counseling on personal finance basics for college students, particularly as

they relate to student loans;

Identifying and comparing rates and terms of private student loans, if needed

to make up a shortfall;

Providing an institution-specific financial aid profile that details the rates and

terms of student loans that students like them have borrowed to attend that

college; and

Helping students to understand their own student loan terms and to identifythe resources they will need to repay these loans after graduation.

Our recommendations about the timing and delivery of this information to families

are grounded in four findings.

First, students and parents had a diversity of information-seeking experiences,

learned at different times, and had different information needs at each point in

the college financing process. There is no one time or place where students and

parents learned about how to pay for college in general or student loans in

particular. Students and parents need to be exposed to relevant information

early, often, and in context about their loan options. They need to be informed

about the effects of their repayment obligations on their lives after graduation.

Second, many student and parent borrowers sought an unbiased, trusted sourceof information that was easy to find and understand. In the vast majority of

cases, students and parents relied on the colleges financial aid office to provide

this unbiased information. Financial aid offices are often the only place that

5 Throughout this report, the terms college and school means any institution of higher

education, including two- and four-year public and private institutions, trade schools, andother for-profit institutions.


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students, especially students without parental support, can turn for personal

assistance. Yet recent revelations uncovered by the New York Attorney General

and others describe a breach of that trust. Standardized consumer information

and advice that is unbiased, clear, accessible, and relevant can help students

and parents make informed college financing decisions.

Third, students lack the personal financial sophistication necessary to makeinformed college funding decisions. This gap among high school seniors has

been reported extensively by the Jump$tart Coalition for Personal Finance

Literacy. Enhanced personal finance counseling for students, particularly

regarding student loans, can address this financial literacy gap and help them

make informed decisions about college financing.

Fourth, students and parents generally did not revisit their college financing

methods or sources once they found a way to finance their first year. For

example, if the student or parent did not take advantage of federal aid or shop for

the best-priced loan for the first year, they did not use federal aid or shop for a

lender for the remaining years. Parents often shifted responsibility to students to

navigate college financing after the first year. Students often replicated the firstyear funding sources and use of lenders. As a result, they compounded

mistakes that could have been avoided and, with financial aid practices

constantly changing (e.g., federal loan limits, interest rates), these mistakes

could be very costly. Students and parents need to be alerted to potential pitfalls

and options each year the student is in college.

Students and parents identified several touchstones in the college funding

process that could be improved to help them make informed decisions. These

touchstones were used by a majority of families and they were an important part

of that decision. The following recommendations, and the accompanying

prototype disclosures, correspond to these touchstones. We encourage

additional consumer testing of the prototypes to ensure understanding andusability.

Summary of Recommendations

1. Emphasize early and often the comparative costs of different college

funding sources and the need to shop around for federal and private

student loans. Families often do not know to maximize scholarships and

grants before using student loans to finance college. Even those who are

ineligible for subsidized federal Stafford loans do not know that they should

exhaust federal loans before turning to private student loans, and that they

should never use credit cards to finance their college education.

EDs Student Financial Aid website provides general information on federalfinancial aid (e.g., the features of federal loans), but it fails to provide advice

or strategies on how to use the information to minimize student debt. ED

could improve the Free Application for Federal Student Aid (FAFSA) and

Student Financial Aid websites to incorporate this advice.

We encourage private entities that administer standardized college tests

(e.g., the College Board, ACT) to provide these messages to parents and


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students when they communicate PSAT, SAT, or ACT test scores. Likewise,

the sponsors of the Common Application could incorporate these strategies

into the tab on their website labeled Advice about financial aid.

Implementation Responsibility: ED and others involved with educating

students and parents about college financing.

2. Standardize key components of the college financial aid award letter.Student and parent review of the college financial aid award letter is an

important teachable moment that colleges have missed. Colleges have

failed to use this opportunity to provide parents and students with

comprehensive information on college costs, financial aid that can reduce the

cost they have to pay, and the conditions surrounding the aid awarded. The

letters also failed to provide advice to help students and parents make

informed borrowing decisions to meet their expected contribution.

A standardized award letter can eliminate roadblocks inadvertently created

by confusing formats and terminology about the cost of attendance, financial

aid that does not have to be repaid, and loans, which do have to be repaid. Italso allows for easy comparison across colleges of the expenses that

students and parents are likely to pay.

A larger version of the snapshot below accompanies the full explanation of

the recommendation (see pages 14-18).

Implementation Responsibility: Congress, ED, colleges.

3. Provide borrowers plain English disclosure of rates and terms about

private student loans when the borrower receives loan approval.

Students and parents were unaware that private student loans are

substantially more expensive than federal ones. They did not know that

private student loans generally carried higher interest rates that were variable

and depended on their credit score, rather than the lower, fixed interest rates


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of federal loans. Many students and parents with private student loans,

especially those who did not qualify for a federal Perkins or subsidized

federal Stafford loan, believed it was not worthwhile to complete the FAFSA

to be eligible for an unsubsidized federal Stafford loan.

Clear and understandable disclosures provided when borrowers are still

shopping around can help students and parents understand the rates andterms of their private student loans and compare their options easily. A

snapshot of a prototype disclosure is below.

A larger version of the prototype accompanies the full explanation of the

recommendation (see pages 18-20).

Implementation Responsibility: Congress, private student loan lenders.

4. Require student loan borrowers to participate in annual online financial

literacy counseling prior to loan disbursements. Mandatory online

counseling can help students graduate with less student debt because they

will learn to budget to determine actual need, to identify low-cost student

loans, to live more economically while in college, to be warned of excessive

credit card debt, and to understand the income necessary to repay theiroutstanding student loans. Annual counseling provides students the

opportunity to change their spending habits, financing methods, or even their

college, when these actions can stil l make a difference.

This counseling requirement would supplement the existing required federal

entrance and exit counseling. Currently, entrance counseling informs

students that loans must be repaid. Exit counseling provides students with

information on repayment and the conditions under which deferments,


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forbearance, consolidation, cancellation, and forgiveness can be granted.

Neither counseling session provides students with practical advice about how

to assess their needs, to understand implications of repayment, or to

decrease borrowing costs.

Some colleges already require annual online counseling prior to every loan

disbursement. ED (or a non-profit entity) could leverage these existingmodels to develop online courses for widespread distribution (i.e., share best

practices among colleges). Additionally, financial literacy experts, including

the U.S. Financial Literacy Education Commission and the National Council

on Economics Education, could help develop these courses.

Implementation Responsibility: Congress, ED, colleges.

5. Develop college-specific loan profiles that accurately describe the

student loans that students and parents have borrowed to attend each

college. The student loan scandals uncovered by New York Attorney

General Cuomo and the Senate Committee on Health, Education, Labor and

Pensions have shown how various financial arrangements between collegesand lenders have created real and perceived conflicts of interest. This

recommendation is aimed at eliminating conflicts of interest and creating

greater accountability for, and transparency of, student borrowing at each

college.

The profile would include statistics on the amount of student debt by entering

class, the interest rates, fees, APRs, repayment amounts, loan term, and the

lenders used. It also would include historical default rates for the college by

the lender. Disclosure of amounts, rates, and terms of student loans, and the

borrowing patterns of students at each college will allow college financial aid

offices to set benchmarks and evaluate the borrowing of their students and

thereby their own performance in recommending loans. This addedtransparency will also allow college financial aid offices to develop preferred

lending lists based on a lenders actual lending practices to students at the

college.

Implementation Responsibility: Congress, ED.

6. Report the rates and terms of private student loans made to students

(by college) to the U.S. Department of Education. Lenders of private

student loans should report loan amounts, rates, and terms (on a student-by-

student basis and college-by-college basis) to ED. ED can use the

aggregate data (stripped of personally identifiable data) to develop the

college lending profiles described in Recommendation 5. Access to thisprivate student loan data for purposes other than for the college lending

profile and the Student Access system (Recommendation 7) would be

prohibited.

Implementation Responsibility: Congress, ED, private student loan lenders.


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7. Improve the National Student Loan Data System (NSLDS) Student

Access and Student Aid Repor t to provide meaningful loan repayment

information. Currently, students do not have one place where all of their

outstanding educational loans (both federal and private) are tallied and

projected payments are detailed. In addition, current disclosures from the

NSLDS are confusing and potentially misleading about repayment

obligations.

Students should be able to receive customized information that includes

minimum monthly repayment amounts based on the actual term and interest

rates, total amounts repaid, and salary ranges necessary to repay their

federal and private loans. Accurate repayment information can help students

understand the income necessary to repay their outstanding loans.

Implementation Responsibility: ED.

* * * * *

We recognize that these recommendations are not a substitute for activeengagement of both parents and students in evaluating college financing options.

Lenders and marketers recognize that prospective college students are a new

audience to tap, and thus make a concerted effort to obtain new customers.

Indeed, there are no limits on the direct-to-consumer marketing of private student

loans. Students about to enter college are often the least equipped to

understand the complex nature of many financial products and the long-term

implications of their financial decisions. Implementation of these

recommendations could arm parents and students with information so that they

make informed borrowing decisions.

In a nutshell, we recommend that every student and parent know the following:

Tap federal loans first, everyone qualifies regardless of need;

Limit private student loans because their costs are higher; and

Never finance college with credit cards.


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Introduction

The cost of a college education and student debt levels have skyrocketed over

the last decade. According to the College Board, total tuition, fees, room, and

board (in current dollars) have increased at four-year public universities by over

70 percent and at four-year private universities by over 50 percent.6 Moreover,

student loan borrowing has been growing faster than grants, scholarships andother aid that does not have to be repaid. The average amount borrowed for a

four-year degree in 2003-04 was $19,300, up from $12,100 a decade earlier.7

Bachelors degree recipients who borrowed to finance their education

accumulated median debt levels at graduation of $24,600 in for-profit institutions,

$19,500 in private nonprofit colleges, and $15,500 in public institutions.8 Indeed,

nearly two-thirds of students attending four-year public colleges or universities

now rely on student loans to finance their education.9

Recent investigations and revelations by the New York Attorney General Andrew

M. Cuomo and the U.S. Senate Committee on Health, Education, Labor and

Pensions have shown that the financial aid offices at a few schools across the

country have taken kickbacks from student loan companies and reaped otherbenefits while making it harder for students to get good deals on their student

loans. The Senate Committee recently released an investigative report

concluding that many student loan lenders routinely engage in marketingpractices that violate the law.10 Given the breadth of the evidence uncovered by

the Senate Committee investigation, illegal student loan marketing activities are

systemic and cannot be isolated to a few problem lenders or schools.

This is even more disturbing given that high school seniors lack personal

financial sophistication to make informed college financing decisions.11 For

example, nearly 50 percent of undergraduate private student loan borrowers fail

to exhaust their low-cost federal student loans to finance their college

education.12

6College Board, Trends in College Pricing, 11 (Table 4b).

7College Board, Trends in Student Aid, 12 (Figure 4a).

8College Board, Trends in Student Aid, 12.

9Heather Boushay, Center for Economic and Policy Research, Student Debt: Bigger and

Bigger, September 2005, 2.

10

United States Senate Health, Education, Labor and Pensions Committee, Report onMarketing Practices in the Federal Family Education Loan Program, June 14, 2007, 49.

11 In its 2005-06 nationwide survey of financial literacy among high school seniors, theJump$tart Coalition for Personal Financial Literacy reported that on average, studentsscored just over 50 percent. The Jump$tartCoalition, Financial Literacy ShowsSlightImprovement Among Nations High School Students, April 5, 2006.

12Catherine A. Wegmann, Alisa F. Cunningham, and Jamie P. Merisotis, The Institute forHigher Education Policy, Private Loans and Choice in Financing Higher Education, July2003, 71.


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With the rise of student loan indebtedness, the lack of financial sophistication of

students, and the widespread actual and perceived conflict of interest at college

financial aid offices, Consumers Union undertook original consumer research to

identify ways to enhance student loan information disclosures and to improve

student loan counseling. The objective was to ensure that students and parents

could identify the most affordable loan choices and understand the resources

necessary to repay them.

Economic research confirms the intuition that consumer confusion about terms

and conditions of products and services can lead to sub-optimal decision-making.

Recent field experiments in areas as diverse as consumer selection of mortgage

products, public schools, and retirement savings and investment products, have

shown that confusing and complex information disclosures can cause consumers

to make decisions that they otherwise would not have made had the relevant

information been presented in a clear and timely manner.13 Indeed, the staff of

the Federal Trade Commission recently concluded that when consumers do not

understand the costs and terms of their mortgages they may pay more for their

mortgage than necessary, obtain inappropriate loan terms, fall prey to deceptive

lending practices, and experience unpleasant surprises and financial difficultiesduring the course of their loans.14 Needless to say, these same outcomes can

occur when financing higher education through student debt.

Methodology

Consumers Union conducted qualitative market research in two phases, with

over 130 students and parents, in five major metropolitan areas (Atlanta, Boston,

Chicago, Los Angeles, and New York) with a wide range of borrowing needs,

student loan debt levels, household incomes, and college choices.15

In the first phase, CU conducted focus groups among recent graduates, current

undergraduates, and parents of undergraduates in Atlanta, Boston, and NewYork about their understanding of the college funding process and student loansin particular. Through these focus groups we obtained an understanding of the

information sources they found most helpful (and least helpful) in learning about

student loans generally and in helping them identify and select loan products and

lenders. We also obtained an understanding of how parents and students used

information to help them assess the implications of repayment.

Based on the issues identified in the first phase, CU developed policy

recommendations and supporting disclosure prototypes to increase the

13 Federal Trade Commission Bureau of Economics, Improving Consumer Mortgage

Disclosures, June 2007 (mortgage disclosures) (FTC Bureau of Economics); JustineHastings, Richard Van Weelden, Jeffrey Weinstein, National Bureau of EconomicResearch, Preferences, Information, and Parental Choice Behavior in Public SchoolChoice, NBER Working Paper 12995, March 2007 (public school choice); James J. Choi,David Laibson, and Brigitte C. Madrian, National Bureau of Economic Research,Reducing the Complexity Costs of 401(k) Participation through Quick Enrollment, NBERWorking Paper No. 11979, January 2006 (retirement savings and investment).

14 FTC Bureau of Economics, Improving Disclosures, ES-12.

15 Appendix A contains a description of the participants.


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understanding of the college financing process. We obtained input from experts

(college financial aid advisors, non-profit policy and advocacy groups, and

financial literacy and disclosure experts) on the recommendations, and we used

the principles of plain English disclosures to develop the prototypes.16 In the

second phase, we tested the recommendations and the accompanying

prototypes for usability and utility in focus groups of current undergraduates, high

school juniors and seniors, and parents of high school juniors and seniors in theNew York area. We refined the recommendations and prototypes based on the

preferences expressed by these consumers. We then retested them among the

same three groups of consumers in Chicago and Los Angeles to arrive at the

prototypes included in this report.

Summary of Learning f rom Students and Parents Who

Have Navigated the Student Loan Process

Students and parents each had their own story about how they learned about

how to pay for college in general and their use of student loans in particular.

Their comments evidenced the challenges facing students and parents as theypay for college. The participants were frustrated by the complexity of the

process. They expressed concern over whether they had obtained the best

student loan deal. Some, but not all, of the participants were concerned about

the income necessary to repay their loans.

To gain an understanding of college funding, and student loans in particular, we

explored the following five areas: (1) how the cost (tuition, room, board, books,

transportation) affected school selection; (2) who and what resources students

and parents used to understand how to pay for college; (3) the specific student

loan information sources they used and found most helpful; (4) the funding

sources used for college; and (5) the repayment obligations of student loans.

1. Cost of Higher Education

Students and parents had various perspectives on how a colleges cost affected

their decision on which college to attend. Some parents and students explained

that if the student was admitted by the college with an academic program or

reputation they wanted, they did not want cost to be an issue. Others explained

that cost was not an issue when they applied, but that after being admitted, they

chose the best college for the money. The best college could be one that had a

major or program in the students chosen field, was close to home or work, or

provided a scholarship. Some students at two-year colleges mentioned that they

could not afford a four-year private school immediately, and would transfer upon

completion of their two-year community college program. Others mentioned theyplanned to go to graduate school, so they were trying to keep the cost of

undergraduate education low. Still others indicated that they limited their choices

to in-state schools that had lower tuition for residents.

16Office of Investor Education and Assistance, U.S. Securities and Exchange

Commission,A Plain English Handbook, How to create clear SEC disclosure documents,

August 1998.


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2. General Information Sources on How to Pay for College

Parents and students reported being initially overwhelmed by the hunt for

information and money to pay for college. First-timers (e.g., parents with their

first child going to college or students without parental assistance) seemed to find

their own way toward the information they needed, although they were unsure

whether they had done the right thing. Students and parents were inundatedwith descriptive information about the sources to pay for college, but they did not

have a clear strategy on how to minimize the amount of borrowed money. A

freshman attending a private four-year university in the Chicago area explained

that because she was first in her family to go to college, she thought strategic

advice on how to prioritize different funding sources would be helpful at the

beginning of the [college funding] process.

In addition to talking with family and

friends, students and parents used

high school guidance counselors, the

college financial aid office, college

fairs, seminars hosted by lenders,financial magazines (e.g.,Kiplingers,

Money), and their accountants or

financial advisors.

Many parents and students started to

learn about federal student aid at least

two years before entering college

(e.g., when the student was a junior in

high school and starting the

PSAT/SAT preparation process).

Figure 1 describes the process to

determine a students eligibility forfederal financial aid.

Early in the process, parents and

students recalled the more general

information sources. During this time

period, parents and students indicated

that they spent most of their time

preparing for college (e.g., doing well

in school, preparing for the SAT test),

identifying colleges that met their

academic needs, and finding out how

to be admitted to the college(s) oftheir choice.

Students and parents explained that

they did not identify the loans that

they would need until the student was

admitted to college and they received

the colleges financial aid award letter. A parent of a four-year student in Boston

summed up this learning process when he said, I looked into [how to finance

Figure 1: The Process to DetermineFederal Student Financial Aid

To determine how much federal student aid(scholarships, grants, work-study, and loans)a student is eligible for, the student/parent

must complete the following three steps eachyear the student attends college.

1. Complete the Free Application for FederalStudent Aid (FAFSA). Federal student aid isgenerally awarded based on a studentsfinancial need with the exception of certainloan products (unsubsidized Stafford loans).All students should complete and submit theFAFSA because it is required for all federalaid. To determine a students financial need,the FAFSA asks questions about income andassets that could be used to pay for thestudents college education. The FAFSAcannot be completed until after January 1 ofthe year the student expects to start college.

The U.S. Department of Education uses thisinformation to calculate the Expected FamilyContribution (EFC).

2. Review the Student Aid Report (SAR).The result of the FAFSA is the SAR. Itcontains the EFC calculation for the student.The SAR is transmitted to the colleges thatthe student/parent has identified on theFAFSA. The SAR also lists the studentsoutstanding federal loans.

3. Review the Colleges Financial Aid AwardLetter. Once the student has been admitted,the college provides a financial aid awardletter to the student that lists the grants,scholarships, work-study, and loans for which

the student is eligible. The letters vary in theamount of information provided to the studentand parent and it is provided in a format of thecolleges choice. This award is based on thecolleges cost of attendance (all direct andindirect expenses, including tuition, fees, roomand board, books, transportation, andsupplies) less the EFC.


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college] earlier, but I wasnt sure what I would get [until my son was admitted].

Even then, students and parents discussed how they were often in a rush right

before school started to line up their financing sources.

When they received the financial aid award letter (often in the late spring of their

senior year in high school), they began to figure out the amount they would be

expected to pay. A sophomore at a four-year college in the Boston areasummed it up when he commented that the financial aid award letter allowed him

to see how much I needed to make up in loans. Several current and former

students indicated, however, that they had borrowed too much because they did

not understand the costs they would have to repay.

Not only do the financial aid award letters fail to provide students and parents

with the information they seek to make informed decisions, but the terminology

and format used make it difficult to understand the award provided. Several

students explained how they did not understand the language used in their letter

and that they called their colleges financial aid office for help.17

Our research found that some financial aid award letters fail to inform studentsand parents about items that they were most concerned about including:

A breakdown of the direct (e.g., tuition, room, board, and fees) and estimates

of the indirect expenses (e.g., travel, books, etc.) of one year of college,

The financial aid awarded that the student does not have to repay (e.g.,scholarships and grants),

The conditions under which scholarships and grants are renewable each

year,

The amount of work-study and the condition under which the student has tofulfill the work-study,

The loans for which the student is eligible,

The loans for which the parent is eligible, The interest rates, loan terms, monthly repayment amounts, and total

repayment amounts of loans for which the student/parent is eligible,

The actual net amount (cost of attendance less financial aid offered) that the

student and parent will have to pay to attend one year of college, and

Where a student and parent can seek additional information.

Students and parents explained how all of this information is critical to the college

financing decision. One current student at a two-year school in the New York

area captured this perspective when she suggested that, when [the college]

send[s] you an admission letter that you have gotten into college, they should

17For more information about the uneven quality of college financial aid award letters

among colleges see the website Financial Aid Letter. (July12, 2007). This website was developed by Kim Clark and Peter Jaegersen under theauspices of Ohio State University's Kiplinger Program in Public Affairs. It displays realfinancial aid letters and then allows users to decode them into plain English. It alsofeatures a comprehensive interactive financial aid dictionary.


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send a small booklet that should be solely, like in big print, about how to finance

your education.

3. Specific Information Sources about Student Loans

Current students and many parents did not understand the significant differences

between federal and private student loans.18 Other than knowing the names offederal loans (e.g., Stafford and Perkins), parents and students could not recall

interest rates or eligibility criteria for federal loans. They did not realize that

federal loans have fixed interest rates whereas most private student loans have

variable interest rates, and most have no cap on that rates upper limit. Nor did

they know that private student loans usually have more onerous terms (e.g.,

repayment penalties), and less flexible repayment options than federal loans.

Students were generally unaware that private student loans charged variable

interest rates based on the borrowers credit score. Indeed many thought the

rates for federal and private student loans were the same. This confusion could

be, perhaps, because a lender can offer a student both a federal Stafford loan

and a private student loan. A sophomore at a Los Angeles-area communitycollege who had a private student loan at 11% wanted to know what the catch

was for 6.8% interest rate for federal Stafford loans. They also expressed

confusion over the concept of interest capitalization.

Student and parent borrowers of private student loans, especially those who did

not qualify for federal Perkins or subsidized federal Stafford loans, believed it

was not worthwhile to complete the FAFSA to qualify for an unsubsidized federal

Stafford loan. A typical comment illustrating this point was made by a

sophomore at a four-year public school in California when he said that the

[Federal] government doesnt really help you out [in paying for college].

For those students and parents with some financial sophistication, concernsabout the terms and conditions of private student loans, included information on:

Interest rates fixed or variable over the loans term;

Minimum monthly payments;

Disbursement fees;

If a variable rate, the monthly repayment amount that could be required if the

interest rate rose to the maximum amount;

When the borrower becomes responsible for interest payments;

When repayment starts;

Interest capitalization;

Projections of interest paid over the term of the loan; and

Penalties for early repayment.

A number of students and parents indicated that one of easiest things to do in the

college financing process was to apply and borrow a private student loan. One

18For a discussion of the differences between federal and private loans see The Institute

of Higher Education Policy, The Future of Private Loans: Who is Borrowing and Why?,December 2006, 5-11.


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parent in New York explained how private student loans were substantially easier

to borrow than federal loans.

Student and parents wanted the private student loan information in simple terms,

with explanatory text next to the numbers. They also expressed a strong

preference for customized information that was specific to their loans. A recent

graduate now working in New York with a monthly student loan repaymentamount of $1,000 described how she, kind of felt like not enough information

was given, because I was kind of like, walking in the dark.

Students and parents turned to varied sources for advice about federal and

private student loans. The main sources included family (parents and siblings),

friends, and the colleges financial aid office (and the colleges financial aid

website). Parents and students alike referred to financial magazines, and a

couple of the two-year students used books and resources including

librarians/personnel at the public library. Students and parents used the

Department of Educations (ED) FAFSA site, and a variety of websites such as

fastweb.com (for scholarships), daveramsey.com, clarkhoward.com,

collegeboard.com, salliemae.com, Yahoo! Finance, and the Motley Fool(fool.com). Many students simply typed student loans in an Internet search

engine.

The students also reported that they were bombarded (from junior year of high

school through at least college graduation) with loan solicitations from private

student loan lenders both in the mail and via email. For example, a senior at a

public four-year university in Atlanta explained how he received private student

loan marketing materials with come-ons like, This is your third notice, apply now

for [a student loan]. To a lesser extent high school guidance counselors

provided advice, but students and parents often said the advice was limited to

help in filling out the FAFSA and other college entrance materials, rather than

help identifying affordable loans.

In an ideal situation, many parents and students would use a non-profit, third-

party source to help them learn about, and evaluate, their loan options. The key

was that the website had to have visibility, possibly connected with the schools

financial aid office. A sophomore at a two-year school in Boston highlighted the

need for visibility of trusted information because the private loan companies are

very visible, you have to compete with them.

A. Mandatory Federal Student Loan Counseling

Another way students learned about federal loans was through mandatory

student loan counseling. Current federal requirements include entrancecounseling and exit counseling. Entrance counseling essentially informs

students that loans must be repaid, but does not provide practical advice about

understanding the costs of repayment or whether they got the best possible deal

on their loan. Exit counseling occurs right before the student graduates and after

the student is legally obligated to pay back their loans. Exit counseling provides

students with information on repayment (e.g., when it begins, repayment

amounts, etc.) and information about conditions under which deferments,

forbearance, consolidation, cancellation, and forgiveness can be granted.


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Current students discussed how counseling, both online and in person, during

their first year had not been meaningful to help them make informed borrowing

decisions. Typical of the comments made was one by a senior at a public four-

year university in Atlanta. She described her online entrance counseling as just

something I needed to do to get my money. She went on further to state that

the counseling took the form of a quiz where you didnt even have to really readit, as you could go back and change [your] answers.

Current students could not recall the content of the entrance counseling other

than the idea that loans must be repaid. They stated that the timing of the

counseling -- usually during freshmen orientation -- had not been an appropriate

time to convey this material. A freshman at a four-year private university in

Atlanta summed it up when he explained, [its] kind of like a buzz kill in the

middle of the second day [of freshmen orientation], everybodys all wound up

already, theyre not going to pay attention.

Recent graduates suggested that the federally required exit counseling was

useful, but that it had come too late for them to change their borrowing behavior.Once they received their counseling, they could not reduce the amount they had

borrowed or obtain better terms on their existing student loans.

B. The College Financial Aid Office

Students and parents sought a trusted source such as personal counseling to

help them understand college financing, with specific help to identify low-costloans. They indicated that the Internet was helpful, but insufficient for this

purpose. Many students expressed the same thought that a senior at a private

four-year university in Boston voiced when she advised others to form a

relationship with your [financial aid] counselor and suck up a little bit.

Many students and parents explained how they borrowed student loans that were

recommended by the college, either by the type of loan or the lender. Several

students told stories about how they applied and took the student loans that the

schools financial aid offices suggested, without examining other options.

Parents and students expressed how they wanted to be told what to do. A first-

year student at a for-profit New York business college explained how she

borrowed the loans her counselor had suggested:

Because they knew basically how much I needed to take out,

what I needed it for, they basically gave me the information I was

looking for. My main concern was how long they would give me

to pay it back [and] what my monthly payment [would be]. Sowhen I spoke to my financial aid counselor, she explained all the

questions that I had.

Not surprisingly, these parents and students were unaware that they had

choices, or that the choice of lender mattered in terms of the cost of the loan.

This perceived lack of choices could be because they were taking Direct Loans,

or that the choices among federal Stafford loans in the Federal Family

Educational Loan (FFEL) program did not vary in a way that mattered to the


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participants. Most students trusted that the school informed them of the best or

only options for which they were eligible. Students explained how they obtained

loans from lenders without understanding whether they had obtained a federal or

private student loan.

C. Preferred Lending Lists

When probed about what it meant for a lender to be on a schools preferred

lender list, students and parents explained various positives and negatives. On

the one hand, some students and parents believed that these lenders had the

best interest rates and terms. Others indicated that the list eased the amount of

research they had to do, because the school did it for them. Lenders on the list

were reputable and you could trust them. A comment by a senior at a private

four-year college in Boston typified these statements when he said, I would

assume they were looking out for my best interest. Some students also

expressed the idea that because the college and the lender worked together,

they could easily solve any administrative difficulty or payment delay that a

student encountered.

On the other hand, some parents and students were skeptical of the relationship

between the school and the lender. A parent in New York with two children who

each had approximately $100,000 in student loans suggested that her view of the

list depended upon how much the parent had to pay. For example, if the parent

had to pay 20 percent of the total cost, she would turn to the preferred lender list.

On the other hand, if the school did not chip in with a lot of aid, she would look

elsewhere for loan products because she did not trust whether the list had her

best interests at heart.

Nearly all students and parents had difficulty understanding how to choose a

lender from preferred lending list. For federal Stafford loan preferred lending

lists, students and parents had substantial difficulty understanding how tocompare loan credits and interest rate reductions after on-time payments for 36

months. They explained how there was no way to compare these discounts and

benefits on an apples-to-apples basis.

For private student loan preferred lists, parents and students felt it could be a

place to start, but that they would still have to apply to one of the lenders on the

list. The private student loan borrowers explained how they had gone to the

bank at which they had a preexisting relationship (or the bank with the greatest

name recognition) and inquired there as a first and, in many cases, only step.

For subsequent years, most parents and students had just reupped the loan with

the lender.

4. Funding Sources Used

Students and parents used a variety of sources to fund the cost of college. They

used scholarships, grants, college savings programs, work study, and current

earnings. Students and parents borrowed federal and private student loans.

Some students used credit cards and then paid them off with earnings. Some

employed students used tuition reimbursement while two four-year students in


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Atlanta mentioned that they had joined ROTC in order to pay for college.

Parents mentioned a variety of additional sources including accessing home

equity, withdrawals from retirement plans, and personal loans to pay for their

childrens education.

Although the students and parents could recall various sources, they were

unsure whether they understood which sources were less expensive than others.Typical of this lack of knowledge was the comment made by a sophomore at a

two-year college in the Boston area: You can just put it [the tuition bill] on your

credit card and you dont have to take out a loan

Parents and students allocated the workload for researching college funding in

different ways. For example, some parents did most of the research, filled out

the FAFSA, and made the funding decisions, with very little involvement from

their children. Some students were responsible for locating scholarship

information or obtaining loan applications, etc. Some parents did the initial work

(prior to the freshmen year), and the students were responsible for replicating the

process in their sophomore, junior, and senior years.

Some students, many of whom were independent of their parents, performed all

of the research and paid for college on their own. These students often were the

ones that failed to fill out the FAFSA, because they were unaware of it, had

encountered administrative problems with the FAFSA password process, or

could not obtain the data from their parents necessary to complete the

application. Some two-year students did not understand how to pay for college

until immediately before classes began. A typical comment was made by

another sophomore at a two-year college in the Boston area who said, It didnt

really hit me how to pay [for college] until I had to pay the bill.

5. Understanding Repayment Obligations

Students and parents voiced two distinct viewpoints about whether they wanted

to know how much debt they were taking on and how it would affect their future

choices. On the one hand, current students wanted to know (and some recent

graduates wish they had known) how much debt they were taking on and how

they would be responsible for it after graduation. A senior at a four-year college

in Atlanta summed this situation up when she said she had thought she was

doing all the rights things by going to college to better herself. But now she was

burdened with $80,000 in loans to repay. I feel when you take out so much

loans, I feel like, dang, Ive got to get married so I can survive, or Ive got to do

something.

On the other hand, several current students were not interested in learning whattheir expected monthly repayment would be or the income necessary to make

such a payment. One student explained how he had blind faith that he would

be able to pay it back. Some participants especially parents stated that

knowing the amount would not make a difference in how much they would

borrow because they would still need to obtain loans to pay for college. Some

current students explained how college was a time for them to enjoy and they

would worry about repaying loans later. These students were reluctant to use an


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online tool or to participate in personal counseling that would help them

understand how their debt repayment may affect their future.

Many recent graduates suggested that their exit counseling was useful, but that it

had come too late. When probed about what they would have done differently

had they been informed about their prospective debt load, the answers included:

Search for additional scholarships;

Work during school;

Change their spending habits; and

Consider whether to change to a less-expensive college.

These students also believed that they had a poor understanding of personal

finance in general. Many parents said they were unhappy with the childrens

level of financial sophistication. These student and parents expressed the need

for more education about the financial decisions facing them as they left college.

One recent New York-area graduates comment expressed this sentiment:

When I graduated college or when I got my first job, I would[have] liked to [have gone] to this seminar and have been told

like, this is going to be your life for the next 30 years, and this is

what you have to do, and this is what you have to invest in. I feel

like Im still always piecing information together.

Other students stated that they became more receptive to understanding the

income requirements to repay their loans as they became more involved with the

process. They expressed keen interest in knowing what salaries would be

required to service their debt. Current undergraduates (and current high school

juniors and seniors) displayed little understanding of what they could expect to

earn once they graduated. As noted above, some parents did the initial work, but

required their children to replicate the process in their second and later years.Some students indicated that they would have liked a reality check at these

points. A recent graduate working in Atlanta with approximately $100,000 in

student debt suggested it is not that big a deal to have an annual counseling

requirement given how much money I owe.


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Implications and Recommendations

Students and parents identified several touchstones in the college funding

process that could be improved to help them make informed decisions. These

touchstones were used by a majority of students and parents, and they were an

important part of the college financing decision. The following recommendations

correspond to each of these identified touchstones.

Accompanying recommendations 1, 2, 3, and 7 are prototype materials that CU

developed to test whether the recommendation would be effective. We

encourage further testing and refinement of each prototype to ensure consumer

understanding and usability.

Recommendation 1: Emphasize early and often the comparative

costs of different college funding sources and the need to shop

around for federal and private student loans.

Justification: Parents and students start to learn in the sophomore year in highschool about how to finance a college education. At this point, they often seek a

trusted source to help them understand the process. Our research uncovered

the fact that few students and parents understand two key aspects of college

financing options at this point. This was especially true of independent students

and parents whose first child was to enter college. First, they did not appreciate

the need maximize the sources they do not have to repay. Second, they did not

understand that they should shop around and compare different student loan

products and lenders. Moreover, they did not appreciate the significant cost

differences between federal and private student loans.

We encourage high schools, colleges, the Federal Government, and entities

such as the College Board and other unbiased and trusted information sources toprovide parents and students with these two messages. An example of one way

to present this information is shown in Figure 2. These messages need to be

provided early, often, and in context. A senior at a four-year public university in

Chicago explained how this information, kind of guides you to get the best way

of paying your school off.

Recommended Enhancements: ED could use the following opportunities to

communicate these messages more clearly and effectively in the college

financing process. This list is not exhaustive.

Add a fourth step (there are currently three) to the FAFSA homepage that

provides advice on how to fund college (STEP 4: UNDERSTAND HOW TOPAY FOR COLLEGE). Nearly all of the parents and students completed the

FAFSA online, so a simple enhancement to the FAFSA website provides an

opportunity to reach nearly every college student annually. ED could include


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a tab under STEP 4 entitled Low Cost Ways to Fund Your College

Education that includes the messages identified above.

Improve the Student Financial Aid (SFA) website to provide advice about the

relative merits of different forms of financial aid and loan products. Currently,

most information on the SFA website is general, fails to explain why it isrelevant, and does not provide advice or strategies on how to use the

information to minimize student debt. For example the Funding Your

Education tab (http://studentaid.ed.gov/PORTALSWebApp/students/english/funding.jsp)

currently provides information about new federal grant programs. It does not

provide the overview advice and strategies that students and parents seek as

they fund their college education.

The College Board and ACT also could provide these two messages to parentsand students when they receive their PSAT/SAT/ACT scores. Moreover, the

sponsors of the Common Application (a not-for-profit organization that uses one

admission application that students may submit to nearly 300 participating

colleges) could improve their financial aid section by providing basic financial aidadvice to students and parents based on these messages.

The success and effectiveness of these messages depends on making them

relevant to the consumer, and providing them with an easy way to obtain

additional information. The messages need to be placed where students and

parents are likely to see and act on them.

Recommendation 2: Standardize key components of the college

financial aid award letter.

Justification: Student and parent review of the college financial aid award letter

is a teachable moment that colleges have missed. Colleges have failed to use

this opportunity to provide parents and students with comprehensive information

on college costs, financial aid that can reduce the cost they have to pay, and the

conditions surrounding the aid awarded. The letters also fail to provide advice to

help students and parents make informed borrowing decisions.

Standardization of key components of the letter eliminates roadblocks

inadvertently created by confusing formats and terminology about the cost of

attendance, financial aid that does not have to be repaid, and loans, which do

have to repaid. Standardization also allows for easy comparison across colleges

of the expenses that students and parents are likely to pay.

Figures 3 and 4 contain a two-page financial aid award letter prototype thatbuilds on concepts in the National Association of Student Financial Aid

Administrators (NASFAA) Award Letter Evaluation Tool.19 We tested the

19National Association of Student Financial Aid Administrators, Award Letter EvaluationTool, at www.nasfaa.org/. The tool provides voluntary guidelines on the contents of thefinancial aid award letter.


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prototype with parents and students against two existing financial aid letters

contained in Appendix B. Page one contains summary information and, page

two contains information families need to know to make an informed borrowing

decision. We encourage further testing of the content, format, and terminology to

ensure consumer understanding and usability.20

Page one summarizes the amount families are expected to pay to attend thecollege. Many existing college financial aid award letters list only the available

financial aid, omitting the full cost of attendance and the amount students and

parents must pay. This amount is vital information, especially for incoming

freshmen deciding which college to attend. Students and parents both wanted to

know the amount they are expected to contribute, without having to make a

calculation (calculations which sometimes require figures not in the letter).

The letter also provides a complete picture of the colleges direct and indirect

costs at the time they need to know it. Although colleges make the cost of

attendance available, it frequently is not provided on the financial aid award

letter. Clearly listing indirect expense estimates (personal expenses, travel,

insurance, etc.) helps define a students budget for the year and alerts them tothe fact that colleges may estimate indirect expenses differently. When indirect

costs are not presented clearly, students and parents miss an important

opportunity to stop and consider the costs they will face.

Page two of the letter lists scholarships, grants, and work-study awarded to the

student. The letter also lists any conditions to renew or maintain scholarships

and grants for subsequent academic years and the requirements for obtaining

and keeping work-study jobs. In our testing, parents found this information helpful

and often were unaware to ask for this information on their own.

The letter identifies the federal loans for which the student and parents are

eligible. Our research uncovered the fact that students from families with annualincomes greater than $80,000 often did not borrow unsubsidized federal Stafford

loans for which they were eligible. Students and parents thought that they did

not provide many advantages compared to private student loans. One way to

address this issue is to list the interest rate of the loans for which the student is

eligible, highlighting the favorable benefits of federal loans.

Students and parents also should be alerted to the fact that they are not required

to use a lender the college recommends and that the college is required to deal

with any lender a student or parent selects. In addition, students and parents

need to be reminded to shop early for their student loans so that they are not

forced to take loans with unfavorable rates, terms, and conditions at the last

minute when they are required to pay their college costs.

The letter informs students and parents whether they are required to accept all,

part, or none of the award and provides instructions on how to do so.

20For another discussion of the necessary elements of a standardized financial aid award

letter see Mark Kantrowitz, Standardize Financial Aid Award Letters, Inside Higher Ed.,(June 22, 2007) (July 12,

2007).


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Finally, the letter provides examples of the terms and repayment of a typical

private student loan for the amount the students and parents are required to pay.

Students were often shocked to learn how expensive private student loans could

be compared to federal loans. This fact needs to be highlighted when students

are determining which college to attend and how to pay for it.

Review of the financial aid award letter is one of the few times that parents and

students stop to carefully consider their college financing options. A

standardized financial aid award letter that is clear and easy-to-understand would

be an invaluable tool to communicate the true costs of college and the best way

to pay for it, allow students to compare among colleges, and help families make

wise decisions about financing college.

Recommendation 3: Provide borrowers plain English disclosure of

rates and terms about private student loans when the borrower

receives loan approval.

Justification: Students and parents were unaware that private student loans are

substantially more expensive than federal loans. They did not know that private

student loans generally carried higher interest rates that were variable and

depended on their credit score, rather than the lower, fixed interest rates of

federal loans. Many students and parents with private student loans, especially

those who did not qualify for a federal Perkins or subsidized federal Stafford loan,

believed it was not worthwhile to complete the FAFSA to be eligible for an

unsubsidized federal Stafford loan.

Content of the Disclosure: Figure 5 contains a prototype one-page private

student loan disclosure that lays out the information borrowers need before

making a student loan commitment.

The prototype disclosure contains a warning box that private student loans are

more expensive than federal loans. The prototype recommends that the student

check with the colleges financial aid office to obtain federal financial assistance.

It also provides a reference point so that students and parents know that newly

issued unsubsidized federal Stafford loans (for which all students regardless of

income are eligible) have an interest rate of 6.8%.

The text in this warning box is critical to help students and parents understand

that private student loans are more expensive than federal loans. It is insufficient

to state that the borrower may qualify for Federal financial assistance through a

program under Title IV of the Higher Education Act of 1965 or that a Federal

student loan may provide the consumer with more beneficial terms and

conditions, including a lower annual percentage rate and fewer and lower fees,

than private educational loans.21

Rather, the message needs to state how

federal loans cost less than private loans.

21Student Loan Sunshine Act, H.R. 890, 110thCongress, 1stSession, 4 (e) DisclosuresRelating to Private Education Loans.


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It is important to highlight the interest rate difference between federal and private

student loans.

It also is important to emphasize that all students, regardless of need, qualify for

unsubsidized federal Stafford loans. Students and parents with household

incomes greater than $80,000 often thought they did not qualify for federalassistance. They need to be reminded that they qualify for favorable federal

loans at the time when they are considering more expensive private student

loans.

In addition to the warning box, the top half of the prototype describes the

principal amount, Annual Percentage Rate (APR), fees paid, the minimum

monthly payment, the term of the loan, and the total repayment amount

assuming the APR does not change. The bottom half of the model provides

additional information and explanation of more complicated terms of a loan

including whether the interest rate is fixed or variable, additional disclosures if it

is variable, repayment penalties, and details on difficulty with repayment. These

disclosures address the deficiency in current law which fails to require lenders toinform borrowers about how their minimum payment could change if their interest

rate were to rise.

When lenders describe the rates and terms in an understandable uniform format,

students and parents can easily choose a private student loan that meets their

needs. Our research showed that some borrowers would choose a loan based

on the APR and repayment period, while others were interested in whether there

was a repayment penalty or an interest rate cap on a loan with a variable interest

rate.

Timing of the Disclosure: Even with enhanced disclosures, if borrowers receive

them after it is too late to shop for another loan or switch to a less expensivecollege, the disclosure will be ineffective. Our research uncovered the fact that

consumers want lenders to provide the information in the prototype once the

lender has approved the loan and set an interest rate that the borrower will pay.

Receiving the disclosure at this time would permit them to understand the terms

fully and to shop for another loan if they so desire.

This recommendation is consistent with recent Government Accountability Office

findings that more effective consumer disclosures are necessary with complex

financial products. Much like credit card disclosures, current private loandisclosures bury important information in the text, use terms that persons without

financial sophistication do not understand, and use small typefaces.22

22GAO Report, Credit Cards: Increased Complexity in Rates and Fees Heightens Need

for More Effective Disclosures to Consumers, GAO-06-929, September 2006.


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Recommendation 4: Require student loan borrowers to participate in

annual online financial literacy counseling prior to loan

disbursements.

Recommendation: Require annual online counseling prior to loan disbursements

in the spring semester (or 2

nd

quarter) of the freshmen, sophomore, and junioryear that provides personal finance content for college students. Some colleges

already require online counseling prior to loan disbursement. For example, the

University of Illinois at Chicago requires students to complete an online course

prior to student loan disbursement that teaches students basic personal finance

skills.23

ED (or a non-profit entity) could leverage these existing models to

develop online courses for widespread distribution (i.e., share best practices

among colleges). Additionally, financial literacy experts, including the U.S.

Financial Literacy Education Commission and the National Council on

Economics Education, could help develop these courses.

Justification: Recent undergraduates were generally satisfied with the content of

the current exit counseling. They explained, however, that the personal financecontent came too late in their college career to make an impact on their existing

loans or spending habits. They wanted to learn the personal finance-related

content (budgeting to determine actual need, identifying low-cost loans by

understanding terms such as APR and interest capitalization, living more

economically while in college, warning about the hazards of credit card debt, and

explaining post-graduation income necessary to repay loans, etc.) at an earlier

time. They also would have been interested in personal assistance in reviewing

loan choices they had already made to determine if they could obtain a lower

cost loan for their remaining years in college. Students and parents both had

difficulty choosing a lender from college preferred lender lists and often fell back

on their bank with which they had an existing relationship

The timing of the counseling is important. Entrance and exit counseling currently

occur around first-year orientation and graduation when students are

overwhelmed with countless other new information and decisions. At the

beginning of the spring semester (or second quarter), students have some

experience with college life. Financial counseling (for budgeting and spending)

will be more relevant to them at that time, and would give them the opportunity to

change their spending habits, financing methods, or even their college, when

these actions can still make a difference.

At the conclusion of the counseling, students should be able to receive personal

assistance to answer any questions they may have. Many students explained

how they were frustrated when they sought help from the college financial aid

office that, in many cases, was understaffed office and/or staffed with students

who did not fully understand the complexities of college financing.

23University of Illinois at Chicago, Financial Counselor. (July 12, 2007).


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A new counseling program at Barnard College recently demonstrated the

effectiveness of personal counseling.24

Before Barnard would certify to a private

student loan lender that a student was enrolled, Barnard required students or

their parents to talk to an aid counselor. The point of the conversation was to

inform families of financial aid options that they may not know about before

borrowing a private student loan. As a result of the counseling, private student

loan volume at Barnard dropped 73 percent. The results suggest that manyfamilies taking out private student loans may not need to, or might not do so if

they obtained personal assistance to help explain the issues.

Personal assistance could overcome the tendency of students and parents not to

revisit financial decisions they had made previously. Students explained how

they would not revisit their college financing decisions after their first year.

Personal counseling could help get students over the hurdle that its too much

work to find a new private loan. This assistance could also assess whether the

student has received the lowest cost loans possible (whether federal or private).

Many colleges have used their business departments to help provide students

with personal finance counseling. For example, the University of Georgia (PeerFinancial Counseling), Texas Tech University (Red to Black), University of

Arizona (Credit Wise Cats) and Wright State University (Wright Financial Path)

each have peer counseling programs. These examples could serve as models

for colleges to emulate so that the counseling burden does not fall completely on

the colleges office of financial aid.

Finally, empirical research highlights the effectiveness of financial literacy

counseling. Empirical research has shown that teaching financial literacy to

students has measurable benefits.25 Other research has highlighted how

students believe they obtain better information about how to finance college and

make personal finance decisions when it is delivered through individual

counseling sessions.26

Recommendation 5: Develop college-specific loan profi les that

accurately describe the student loans that students and parents have

borrowed to attend each col lege.

Recommendation Explanation: ED should develop a statistically accurate profile

of the student loan lending activity that occurs at each college. To make the

profile comprehensive, Congress should require lenders of private student loans

to report the loan amounts, rates, and terms of these loans (by student and

college) to ED (see Recommendation 6).

24Scott Jaschik, Bucking the Tide on Private Loans, Inside Higher Ed. July 16, 2007.

25Karen Gross, Joanne Ingham, and Richard Matasar, Strong Pallative, But Not a

Panacea: Results of an Experiment Teaching Students About Financial Literacy,NASFAA Journal of Student Financial Aid, 2005, 7.

26Julia Y. Porter, W. Richard Fossey, William E. Davis, Michael F. Burnett, Janice

Stuhlmann, and Patricia A. Suchy, Students Perceptions of Factors that Affect CollegeFunding Decisions NASFAA Journal of Student Financial Aid, 2006, 1.


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The profile would include statistics on the amount of student debt by entering

class, the interest rates, fees, APRs, repayment amounts, loan term, and the

lenders used. It also would include historical default rates for the college by the

lender. ED would be required to release each colleges profile publicly within a

reasonable time before the start of the next academic year.

Justification: The student loan scandals uncovered by New York Attorney

General Cuomo have focused on eliminating conflicts of interest between

colleges and lenders and ensuring that college financial aid offices operate in the

best interests of students. The use of preferred lenders and other arrangements

have created real and perceived conflicts of interest. Many leading lenders have

agreed to codes of conduct. A growing number of colleges have also entered

into such agreements and others have made voluntary changes to eliminate

even the appearance of a conflict of interest.

This recommendation is aimed at eliminating conflicts of interest and creating

greater accountability for, and transparency of, student borrowing at the college

level. Substantial numbers of students seek individual assistance from collegefinancial aid offices. Financial aid offices are often the only place that students,

especially independent students, can turn for personal assistance. Students

explained how they followed the advice of their colleges financial aid office.

Despite the recent investigations by the New York Attorney General and others,

students and parents continue to rely on college financial aid offices for advice

about student loans. A college lending profile could shine light on any potential

conflict of interest between college financial aid offices and students by

highlighting the actual lending activity that has occurred for students at each

college.

Disclosure of rates and terms of federal and private student loans, and the

borrowing patterns of students at each college, will allow college financial aidoffices to set benchmarks and evaluate the borrowing of its students and

thereby their own performance in recommending loans. This added

transparency will also allow college financial aid offices to develop preferred

lending lists based on a lenders actual lending practices to students at the

college.

Recommendation 6: Report the rates and terms of private student

loans made to students by colleges to the U.S. Department of

Education.

Recommendation Explanation: Lenders of private student loans should reportloan amounts, rates, and terms (on a student-by-student basis and college-by-

college basis) to ED. ED can use the aggregate data (stripped of personally

identifiable data) to develop the college lending profiles identified inRecommendation 5. The college lending profiles would, in turn, include statistics

on the amount of private student loans borrowed by entering class, the interest

rates, fees, APRs, repayment amounts, loan term, and the lenders used. Access

to this private student loan data for purposes other than for the college lending

profile and Student Access (Recommendation 7) would be prohibited.


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The reporting of consumer loan data to the Federal Government is not

unprecedented. The Home Mortgage Disclosure Act, enacted by Congress in

1975, requires most mortgage lenders located in metropolitan areas to collect

data about their housing-related lending activity, report the data annually to the

government, and make the data publicly available. Initially, HMDA required

reporting of the geographic location of originated and purchased home loans. In

1989, Congress expanded HMDA data to include information about denied homeloan applications and the race, sex, and income of applicants and borrowers. In

2002, the Federal Reserve Board amended the HMDA regulations to require

lenders to report price data for certain higher-priced home mortgage loans, and

other new data.

Moreover, recent revelations that lenders of private student loans price their

loans based, in part, on the college that the borrower attends, also justify public

scrutiny.27

Recommendation 7: Improve the National Student Loan Data System

(NSLDS) Student Access and Student Aid Report to providemeaningful loan repayment information.

Recommendation Explanation: Currently, the ED maintains a comprehensive

database of federal student loans and grants. The National Student Loan Data

System (NSLDS) receives data from schools, guaranty agencies, the Direct

Loan, Pell Grant, and other ED programs. At NSLDS Student Access (a

helping families finance college

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