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.
