Never before has the topic of student loans featured so
prominently in the nascent stages of a presidential campaign. Nearly every
major candidate has publicly addressed how they would help Americans better
manage their student debt, with policy prescriptions ranging from making
college debt-free for all students to simplifying and expanding access to
income-based repayment options.
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What is often overlooked in the rhetoric about student debt,
however, is the question of how we can help students make informed borrowing
decisions in the first place. Making strategic investments at the front end of
the process to help students borrow amounts that are well-suited to their
personal circumstances could help reduce downstream challenges with repayment
or debt management.
Choosing whether and how much to borrow is a highly complex
decision to navigate. In an ideal decision-making process, students would
simultaneously consider a multitude of important factors—like the probability
that they will graduate from the college where they’re planning to enroll; the
earnings return they can expect from a degree in their field of study; the
likelihood that they will stay motivated and focused on coursework even when
faced with many competing interests for their time and attention—and borrow if
the benefits of doing so outweigh the costs.
As work in behavioral economics and psychology has
demonstrated, though, people’s actual decision-making processes are typically
quite different from this ideal. For instance, one common behavioral tendency
is to stick with the status quo when making an active choice would require a
substantial investment of cognitive energy and attention. In the context of
student loans, this could mean that students borrow the full amount they are
offered in a financial aid package even if they need less than this amount to
enroll. Alternatively, at institutions that do not automatically offer students
loans as part of their financial aid packages, students who might benefit from
borrowing may not apply for a loan.
Over the past several years, researchers have implemented a
variety of interventions to help students make active and informed decisions at
other similarly complex stages on the road to and through college, such as
where to apply to college, whether to complete the federal financial aid
application, and how to navigate a complex array of financial and procedural
pre-matriculation requirements during the months after high school graduation.
These interventions, which apply insights from behavioral sciences, have cost
relatively little per student but have generated substantial improvements in
college enrollment and persistence.
In these cases, the direction of how to nudge students is
fairly clear. Encouraging low-income students to complete the Free Application
for Federal Student Aid (FAFSA) qualifies them for thousands of dollars in
need-based grant aid, making college more affordable if they choose to
matriculate. Supporting high school graduates to complete required tasks at the
college where they have been accepted and decided to enroll helps them follow
through on their own intentions.
By contrast, providing loan guidance is inherently
student-dependent. For a hard-working, motivated student planning to pursue
engineering at a high-quality institution, encouraging them to consider a loan
to meet the cost of attendance seems sensible. On the other hand, cautioning a
student who is pursuing a less career-oriented field at a lower-quality institution
to limit their borrowing might make sense.
The United States Department of Education (USDOE) has
attempted to address the personalized nature of student borrowing decisions by
requiring all students to complete loan entrance counseling before they receive
a federal loan. However, as Ron Lieber reported in a recent New York Times
article, the loan counseling itself is often beset with complex, seemingly
irrelevant information that likely only further impedes active and informed
decision-making by students.
How, then, can we intervene to help students make informed
borrowing choices?
Avoid defaults; prompt active choice. As I describe above,
various defaults are built into the loan origination process: some institutions
automatically include loans in their aid packages; other institutions do not
include loans by default. Some institutions automatically offer students the
full loan amount for which they are eligible. In each case, these default
policies can lead students to borrow more or less than they would if prompted
to make an active decision. Instead of employing these loan packaging
strategies, colleges could actively encourage students to assess whether they
need a federal loan to meet the cost of attendance or to pursue their intended
program of study, and if so, how much they need to borrow to do so.
Proactively deliver simplified information about the loan
borrowing process. For many students, there is a several month gap between when
they complete the FAFSA and when they finalize their borrowing decision. The
Department of Education could leverage the contact information students provide
on the FAFSA to send students loan-related planning prompts during this
interim. Messages could emphasize, for instance, that students get to choose
how much they borrow—they do not have to simply accept the amount offered by
their institution. Other prompts could inform students that monthly payments as
a portion of take-home income will vary considerably depending on their major
and the institution they attend; these prompts could encourage students to
choose a loan amount that will have manageable monthly payments given their
planned course of study. High schools, colleges, and community-based
organizations could employ similar outreach strategies with their students.
Reduce barriers to professional, individualized loan
counseling. The student loan origination process is sufficiently complex that,
for many students, the types of low-touch nudges I’ve just highlighted may not
go far enough to help students make an informed borrowing decision.
Well-trained, impartial financial aid advisors or loan counselors can help
students determine borrowing amounts that are well-aligned with their personal
circumstances and goals. This loan counseling need not be in person, and can be
delivered at a large scale. Researchers and practitioners are using a variety
of interactive technologies to provide high-quality advising to students at
various stages in the college pipeline; these strategies could easily be
adapted to expand the number of students who have access to professional
assistance when navigating complex study loan decisions.
Intervening early on to help students make informed
borrowing decisions should be an important component of broader policy efforts
to reduce the volume of people who experience repayment struggles or
unmanageable debt burdens.
Source:
https://educationloansinindia.wordpress.com/2016/06/22/when-it-comes-to-student-loans-theres-no-simple-nudge/ |
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