Students are uneducated about student loans

Written by
Peter Dunn

Hopefully the irony of the title isn't lost on you. Students are incurring tens of thousands of student loan debt and yet, they are completely uneducated about the financial ramifications of the loans. This is unacceptable. Thankfully, one financial institution is attempting to fill this gap in knowledge.

"Indiana University has been able to assist students in making better financial decisions by making the student loan process a bit more transparent and informative. Students were provided with potential loan repayment information at the beginning of the borrowing process, and the students were provided their total student loan balance, prior to taking on more loans. And to no one's surprise, borrowing fell 11%. Sadly and expectedly, the success of this transparency was met with criticism."(courtesy of the Indy Star)

Among the many criticisms of this new practice is the thought that if students are alerted to the realities of student loan debt they will hesitate to borrow the funds necessary for a decent education. Also, there are people who feel like 18 year olds should know enough about loans to know what they are getting into. On both of these counts I heartily disagree. For starters, I did a study in 2012 where I researched college education costs in the state of Indiana. I found that 52% of college expenses go to non-tuition related expenses. 52% of the cost of college is for living expenses, meal plans, and other incidentals. Yeah, you read that right, 52% of your student loans were for cafeteria mashed potatoes and living in a cinderblock dorm room. By reducing non-tuition expenses, students can have their cake and eat it too.

As for the second criticism, well I have major issues with that one, so allow me to get ranty. You say 18 year olds should know about the dangers of taking on so much debt, but how would they ever learn this? From their parents? The same parents who have a car loan and a mortgage and a credit card and a medical bill payment plan? Of course they aren't going to think twice about paying for college with borrowed money! It's all they know! There are some parents who have instilled financial wisdom on their offspring, but they are a very, very small minority.

My other big issue with student loans is this:

"Imagine the following scenario in which you saunter off to buy a $125,000 home. To begin, you have no job, no credit history, no income, no education, no assets, and no current means of making future mortgage payments. And before you know it, the loan officer smiles, hands you the keys to the house, and informs you the bank will send you your first payment notice in four years. Oh, and they'll tell you what your payment amount is, four years from now as well. Yep, that's not gonna work. Welcome to the world of higher education loans. Now you know why there were rampant reports of unemployed Americans enrolling in college classes when the recession hit. While some students were there for the education, many others were there for the ridiculous loan underwriting standards." (courtesy of the Indy Star)

I know it get soapboxy about student loans a lot, but you've got to admit I have good reason. Mostly I want to highlight a school that's actually doing something about the problem. And in full disclosure, I do have a consulting relationship with the Department of Financial Literacy at Indiana University, but I'm highlighting their initiative because I believe it's smart. Most students are barely 18 when they enter college, and student loans are their first major financial decision. Unfortunately, it's one which impacts their financial lives for the next 10-20 years.

Read my full column here.

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