Kids & Money

Student loan misunderstandings borrow trouble

Here’s a worrisome survey item from last week that caught my attention: Many college students are signing on the dotted line for student loans they don’t fully understand.

So many thousands of dollars on the line and they don’t know the terms and the numbers?

According to the report from the nonprofit Young Invincibles, nearly two-thirds of student loan borrowers misunderstood or were surprised by details of the loan process. For example, when asked about the monthly repayment, 20 percent acknowledged that the amount was unexpected.

Comments from three of the anonymous students quoted in the report offer more context:

“I did not fully understand the extent to which I was getting myself into. All I knew was in order to pay tuition, I would need to take out private and federal loans.”

“Obviously, I understood that I would have to repay my loans upon graduation. However, I did not realize how much interest (it) would take.”

“Looking back, I wish I asked a million more questions than what I did, but at the same time I don’t think I knew what to ask.”

With student loan debt now at a staggering $1 trillion, according to the latest estimate, there has been a whole lot of uninformed borrowing going on among the 37 million Americans who currently owe on their college loans.

But this is not so much a financial aid issue as it is a financial literacy issue. It reminds me of the housing crisis, where many families came up short partly because they didn’t understand the terms and consequently bought more house than they could afford.

Should we be surprised that many students do not understand the terms of their student loans?

Not really. After all, financial aid packages can be complex, multipage documents, and most 18-year-olds have had little or no experience with debt of any kind. And unfortunately parents might not know the answers either.

Here’s the real disappointing part: Much of the confusion and unpleasant payment surprises could be avoided if teens were exposed to just a little bit of money management training.

Yet Congress, state legislators and school boards continue to miss opportunities to require mandatory financial education courses for high school and college students.

While students and parents obviously need to comprehend the loan commitments they’re getting into, the financial aid system owns this problem too.

Mark Kantrowitz, publisher of the website, has been beating the drum for better financial aid disclosure standards for a long time. Kantrowitz said loan counseling provided by colleges is often minimal, and financial aid award letters might not lay out the repayment process clearly.

“Many students will sign whatever piece of paper is put in front of them,” Kantrowitz said. “They figure that they’ll figure out how to pay back the debt after they graduate. But the time to minimize student loan debt is before you incur the debt, not afterward.”

The new Consumer Financial Protection Bureau wants to help students and parents and is creating a financial aid and college cost disclosure statement. Among other things, the bureau’s Know Before You Owe project hopes to set standards that will make clear the amount of debt and corresponding monthly loan payments that will be required to cover the college tab.

Whatever the disclosure reforms, Kantrowitz said, student borrowers need to remember this: A loan is a loan is a loan.