Deanne Loonin, Director of NCLC’s Student Loan Borrower Assistance Project, spoke on a panel this week at the annual conference of the National Association of Student Financial Aid Administrators. Here are her more extended views on the session, “Student Borrowing: Reasonable Debt Levels, Navigating Repayment, and the Consequences of Over Borrowing.”
I don’t like the term over-borrowing, among other reasons because it’s so subjective. If someone incurs a lot of student loan debt, but ends up with a productive career, did she over-borrow? The real problem is the consequences of unmanageable student loan debt. This could be caused by too much borrowing, but there are many other reasons why borrowers get into trouble with student loans. The majority of my clients do not start out with a lot of debt. However, due to draconian collection laws and outrageous collection fees, even a small amount of debt can quickly balloon into a large amount.
The term “over-borrowing” tends to involve moral judgments. We often look down on people who “over-borrow’ because we think they should have known better. We generally ignore the vast evidence, particularly in behavioral economics research, that most people enter into consumer transactions with an “optimism bias.” Most people know there could be problems down the road, but tend to think the problems will happen to others. In retrospect, it can be easy to see if a borrower incurred too much debt, but it isn’t always so obvious at the time she is signing up for school. This is particularly true if the school is selling (or overselling) its programs.
We need a lot more information about why borrowers get in trouble with student loans. These studies should include surveys of borrowers about why they think they got behind on student loan payments. The main reason why our clients say they default is because they don’t have the money to repay. Usually, this is because they are not working. These economic realities make it harder to find easy solutions to high default rates. We keep hearing how better information and communication will resolve defaults, but the truth is that communication and information do not resolve the structural problems that cause so many defaults.
My experience with low-income clients is that they don’t make worse decisions than those with more money. The difference is that they have little or no margin for error if they make bad decisions or if decisions that seem wise don’t work out. They rarely have the safety net of moving back in with parents or getting financial assistance from friends or family. The high cost of being poor in this country makes things worse. Food is often more expensive, bad credit means higher phone bills, difficulty getting jobs etc.
Financial literacy and counseling might help, but they are not the panacea that so many want them to be. The danger is to buy the delusion that these types of programs will be the difference maker.
Many schools have created what appear to be strong counseling programs to advise borrowers about the risks of borrowing. These are promising, but the best thing that schools can do is make sure that they are offering a product that is likely to lead to good outcomes. “Good” outcomes means that consumers are likely to complete (graduate) and get jobs that allow them to pay off their loans. It also means that schools must be honest about completion and job placement rates and about cost.
Those involved in servicing and collections need to understand the complexity of student loan problems and not try to push a one size fits all approach on everyone. We also need to eliminate a servicing and collection system that rewards collectors based on their own financial goals rather than borrower goals.
Most important, we need to understand that we have consciously chosen to create a higher education financial aid system that is based on loans (debt) and is very liberal in providing those loans. On the other hand, as a policy matter, we have chosen to fund this system in part by creating draconian collection policies. This may keep schools and many in the student lending industry in business, but it does not benefit student borrowers.
Instead of hoping that better information will solve the problems of burdensome student loan debt, we should change our policies to eliminate the extraordinarily punitive collection powers AND improve the programs that allow borrowers the chance to get out of default and start again.