I’m back from a few days in Washington, DC. Despite working on Capitol Hill for two years, I’m still struck by the disconnect that seems to exist between our real world and their political world. These ecosystems need to collide if we’re going to seriously begin addressing the real world student loan debt crisis. Here are three simple ideas that would help borrowers immediately and could be the basis for a long-term solution to the spiraling college debt problem:
- Stop categorizing federal loans as “aid” on Financial Aid Award Letters
- Stop charging students and parents origination fees to obtain federal loans
- Start requiring the Direct Loan Program to report Annual Percentage Rate (APR) calculations
We know the statistics: there is $1.3 trillion of student loan debt outstanding. We’ve heard the sound bites: college loans hamstring graduates who have taken on piles of debt and are underemployed. So what’s the answer? Previously I’ve offered my thoughts about college affordability and ways for students to avoid excessive debt. However, there are some factors that are simply out of their control and need to be fixed in Washington. And soon.
In the political world, current efforts are largely focused on relieving over-leveraged borrowers of repayment stress with loan forgiveness programs and income-based repayment plans. Great, but these programs address the problem after it has occurred and leave the root causes untouched. We need to fix the problem at the source. In this case, before a loan is made.
Transparency and disclosure are all the rage – and rightfully so. But, the federal government comes up woefully short in providing adequate disclosure in two critical areas for the Direct Loan Program:
- Marketing loans via colleges
- The total cost to borrowers
Did you know that the federal government:
- Permits colleges to categorize federal student loans as “aid” on Financial Aid Award Letters.
- Charges borrowers fees but does not disclose an Annual Percentage Rate (APR) for their loan?
In effect, the largest student loan lender — with over a 90% market share — permits itself to market student loans as financial aid through colleges and universities without disclosing the APR. I bet the Consumer Financial Protection Bureau would have a field day with a private lender engaged in these business practices.
Loans as “Aid”
Remember the old story of the wolf in sheep’s clothing? I do whenever I think about a high school senior first encountering a student loan “awarded” via the financial aid process. Or worse, a parent relieved that their child’s dream college is within reach because they’ve been “awarded” a PLUS loan. A PLUS loan is packaged as “aid” but it comes with big up-front fees and encourages parents to borrow up to the full cost of attendance as long as they don’t have adverse credit — a very low level of scrutiny. Intentional or not, the disingenuous miscategorization of loans as aid no doubt confuses borrowers and leads to some very bad decisions regarding college affordability.
APR not required for a lender with a 91% market share
According to the College Board, for Academic Year 2013-14, approximately $113 billion of student loans were made. Approximately $9.7 billion of these loans were made by non-federal lenders, mostly banks, credit unions, finance companies and some state based entities. Few, if any, charge fees to originate the loans, and all are carefully watched to ensure consumers are treated fairly and receive proper disclosures including APR calculations.
Then we have the other lender, the federal government, which made more than $103 billion in student loans. This monopolistic market share resulted from a long political struggle to replace private lenders participating in the government’s guaranteed student loan program with a nationalized student loan program under the auspices of the Department of Education.
No matter your opinion of the Direct Loan Program, can anyone make an argument to justify:
- Why government charges fees to obtain loans when private lenders do not?
- Why the Department of Education is not required to disclose an APR?
The Good News – Thanks to the DoE
Kudos to the Department of Education for recognizing the first problem addressed here – student loans nicely wrapped in the sheep’s clothing of a Financial Aid Award Letter. Beginning in Academic Year 2013-14, the DoE introduced its Federal Aid Shopping Sheet, which asks colleges to CLEARLY show the:
- Cost of attending the college
- Amount of grants and scholarships awarded to the student
- Net Price that the family will pay.
The standardized form then delineates what options the family has to pay those net costs:
- Work options
- Federal loan options
- Other options including non-federal loans
Thousands of colleges have agreed to use the Federal Aid Shopping Sheet but thousands do not. Some likely add to the confusion by providing students with both the institution’s Financial Aid Award Letter and the Federal Aid Shopping Sheet.
Here’s a federal regulation I would support: require all Title IV eligible colleges to use the same form of a Financial Aid Award Letter with simple and clear disclosures so families can easily compare the cost, aid packages and options for filling the gap. Don’t re-invent the wheel: the Shopping Sheet seems to fit the bill very nicely.
A Final Thought
To end where I started: our political leaders, no matter how well intentioned, seem stuck on a very unproductive treadmill of churning out sound bites about the student loan mess. They’re spending too much political capital addressing the symptoms of the problem rather than actually fixing it at the root. It’s time to replace political sound bites with real world actions to help families avoid excessive student debt. My suggestions:
- Require all Title IV eligible schools to use the Federal Student Aid Shopping Sheet
- Stop charging students and parents fees to obtain federal loans – the private student lenders do not charge fees
- Provide APRs to federal borrowers
What do you think?
John Hupalo is the Founder of Invite Education and co-author of the recently released book: Plan and Finance Your Family’s College Dreams: A Parent’s Step-by-Step Guide from Pre-K to Senior Year