With the September release of the first official 3-year cohort default rates (CDRs), default prevention has never been a higher priority at schools across the country. While much of this concern focuses on the repayment phase of the life of the loan, the borrowing phase is arguably just as important. One of the best ways to avert default is to encourage students to adopt smart borrowing habits.
But how do schools accomplish this? The following list presents strategies schools can use to promote smart borrowing decisions within their student population.
Personalize student loan counseling. Common sense suggests that face-to-face interaction produces better outcomes when it comes to student loan counseling. In-person counseling allows students to ask questions and financial aid professionals to make note of important information students may otherwise miss. Most importantly, personalized counseling can be tailored to the individual student’s situation, thus addressing his or her needs more directly.
While there is widespread agreement that in-person counseling is the most effective, schools often lack the resources required to provide it, whether because of a large student population, lack of adequate staffing levels, or both. In its place, many schools try to provide at least some individual contact to each student. Some schools require students to pick up loan request forms in person at the financial aid office, for example. Others strongly encourage students to attend smart-borrowing workshops, giving staff members the opportunity to address key topics and students the chance to ask questions.
Provide borrowers with regular reports on their total amount borrowed and likely monthly repayments after separation. Along with academic success, total amount borrowed is a primary indicator of potential repayment success — or the lack thereof — after graduation. All too often, students fail to consider how their borrowing behavior will impact them down the road. To help fill this judgment gap, some schools have started providing borrowers with periodic reports of their total amount borrowed, along with likely monthly payments under a standard repayment plan.
Another useful element to include in such a report would be potential debt-to-income ratios for a student’s major, once he or she has declared one. The Occupational Outlook Handbook (at www. bls.gov/oco) can provide potential income information for most careers.
Institute an effective financial literacy program. Encouraging students to keep their potential future earnings in mind when making borrowing decisions is a critical piece of a successful default prevention program. Placing these decisions in the context of borrowers’ overall financial lives can help solidify better choices into lasting financial skills, and this is where an effective financial literacy program comes into play. Students need a basic level of knowledge to manage financial challenges and reach their goals. Providing students with information on budgeting, saving, credit, debt, and other essential topics will help them make more informed borrowing decisions and provide them with the tools they need for successful repayment in the future.
Provide in-depth counseling to at-risk borrowers. In order to employ counseling resources most effectively, some schools have begun to develop “early warning” systems that help them identify current borrowers most at risk of defaulting. Warning signs may relate to academics (low test scores, excessive absences), high levels of borrowing, or personal concerns. For these borrowers, the schools adopt a more proactive counseling strategy, encouraging borrowers to create an academic plan, receive financial literacy training, and/or participate in career counseling. Through this intrusive-counseling strategy, schools can redirect students toward completion and repayment success, heading off likely default before it happens.
For more information
To learn more about the importance of smart borrowing choices and the impact of student debt-to-income ratios, see TG’s recent report, Balancing Passion and Practicality: The Role of Debt and Major on Students’ Financial Outcomes. The report may be found at http://www.TG.org/pdf/Balancing-Passion-and-Practicality.pdf.