Which student loan repayment option is a better deal: a loan with a 4 percent fee and 9 percent interest rate, or one with a 5 percent fee and 8 percent rate?
This question was part of a quiz on loan terminology found at collegegold.com, which is affiliated with the FastWeb.com financial aid and scholarship website.
How parents and prospective college students answer that question says a lot about how much they understand the often confusing and complex financial aid process.
For the record, a loan with a 5 percent fee and an 8 percent rate is the correct answer. That’s because an extra 1 percent in the interest rate costs more than a 1 point increase in the fees.
Two weeks ago, I wrote about a survey from the nonprofit Young Invincibles that found many college students were signing on the dotted line for student loans they didn’t fully understand. Some students surveyed didn’t even have a ballpark idea of how much they’ll need to pay back.
This problem has been building for years. But what makes it particularly frightening now is that there’s $1 trillion in student loan debt outstanding, and failure to repay this money could have lasting negative consequences for millions of young adults.
That’s why the new federal Consumer Financial Protection Bureau is paying attention to loan literacy. Through its Know Before You Owe project, the bureau is working with the U.S. Department of Education to come up with a better financial aid and college cost disclosure statement.
On Wednesday, the consumer bureau released a test version of the Financial Aid Comparison Shopper, an online tool designed to help families plan for all the college costs. Go to www.consumerfinance.gov/payingforcollege.
The shopper has more than 7,500 schools in its database, including state and private colleges, vocational schools and community colleges.
Earlier this year, thousands of students, parents, and educators told the bureau what they wanted in an improved financial aid statement. Five key desired elements emerged for a standardized financial aid shopping sheet:
• The estimated student debt by graduation.
• The estimated monthly loan payment (principal and interest) after graduation.
• The likely ability to repay the loan, in relation to potential average starting salaries.
A complete breakdown of costs to attend schools.
• School-specific information, such as graduation rates and student loan default rates.
The consumer bureau said respondents also wanted to see better explanations of key terms, more information on federal work-study programs, and measurements of student loan default rates.
Another point of emphasis: “The shopping sheet should warn students about the dangers of student loan default and make sure students do not see default as an option.”
Besides serving as a framework for the online tool released this week, the information will be used by the Department of Education in a report to Congress later this year on student loans.
Here’s hoping that better information about financial aid options will lead to more informed decisions by students, along with a healthier dose of common sense on how much money they can afford to borrow.