In an American higher education system plagued with ballooning student debt, many students are largely unaware of their loan levels. This is no small problem, given that total outstanding federal student loan volume has more than doubled since 2007, from around $500 billion to over $1.3 trillion today, and average debt per undergraduate borrower stands at over $30,000.
Surveys conducted by the Brookings Institution shed some light on these points. Only 38 percent of freshman borrowers can accurately estimate the amount of debt they have, while 14 percent believe incorrectly that they have no debt. This level of unawareness can obviously have several negative effects. Without knowledge of the long-term costs of their loans, borrowers might be less willing to restrain their spending. Further, they risk being unprepared to meet their monthly payments when the time comes to start repaying.
Given the $1.3 trillion in outstanding student debt, it is crucial that student borrowers have a comprehensive understanding of their loans.
Federal policy does too little to educate students about their debt. Though borrowers are required to undergo federally mandated loan counseling, the Department of Education’s online portal is confusing and ineffective. The Education Department is also required to send a “Plain Language Disclosure Form” to all borrowers—but the language is anything but plain. At almost 7,000 words, the six-page document is dense, full of jargon, and difficult for anyone to understand—especially a young person right out of high school. The current form also leaves out important information, such as the loan’s annual percentage rate (APR). The APR is used to project the total cost of the loan on a yearly basis, and includes not just the interest rate, but also any additional fees that the loan carries. Federal student loan origination fees, for example, can lead to thousands of dollars in additional costs for borrowers. While the current form mentions that these fees exist, it does not project their costs to borrowers.
Lawmakers on both sides of the aisle are beginning to recognize this issue. Reps. Luke Messer (R-IN) and Emanuel Cleaver, II (D-MO) recently proposed a bipartisan bill (H.R. 4119) aimed at updating and improving the Plain Language Disclosure Form. The Student Loan Disclosure Modernization Act would simplify and condense the language on the form and would also mandate that the form include the APR, providing borrowers with a more accurate projection of the loan’s total cost.
Importantly, the legislation calls for consumer testing, which would help to ensure that the new form is an improvement upon the status quo. It would also call on the Education Department to consult with the Federal Reserve—which recently overhauled the disclosure form for private student loans— on how to craft the new form. Prospective borrowers would also be required to actively sign the form before they receive a loan. Currently there is no such requirement.
Given the $1.3 trillion in outstanding student debt, it is crucial that student borrowers have a comprehensive understanding of their loans. This legislation is an important first step toward addressing the issue of loan disclosure, but more work needs to be done, such as reforming the ineffective system of loan counseling. Helping borrowers navigate the complicated student loan system is an area ripe for more bipartisan initiatives. No one wants to see young Americans saddled with debt that they didn’t even know they had.
Also published on Medium.