As a society, we have succeeded in communicating the economic payoff that a college education can offer. At present, the value of lifetime earnings for a person with a bachelor’s degree is $500,000 more than a high school graduate.
We have not, however, succeeded in helping many of our students understand how to pay for that education without incurring significant—and sometimes crushing—debt.
More than half of households headed by young adults (ages 21-29) carried an average of $31,000 in student debt in 2013, according to the Federal Reserve Bank of New York. A range of studies show that debt is linked to higher levels of stress and anxiety, poorer academic performance, greater dropout rates and lower wealth accumulation, among other impacts.
We can—and must—do better by students in the way of financial literacy and education. It’s on my mind every day at Maryville University as I teach the principles of accounting.
Student loan entrance counseling is a vital part of this equation. It aims to equip borrowers with the financial knowledge and skills to make optimal decisions about their student loan debt.
Generally unhelpful
Federal legislation requires all federal student loan borrowers to participate in student loan entrance counseling before they receive their first loan disbursement. Originally designed to take place in person, an estimated 70 percent of this counseling now takes place through an online module created by the Department of Education (DOE). It covers basic topics such as capitalized interest, the types of loans available, budgeting, repayment and default avoidance.
While research on the outcomes and effectiveness of student loan counseling is limited, one national study saw borrowers describing their counseling session as “tedious, cumbersome and generally unhelpful.” Not a promising start.
Looking at the numbers
To gain a better understanding of student loan counseling effectiveness, I joined a group of my peers to analyze responses from the National Student Financial Wellness Study (NSFWS), the only known nationally representative dataset that collects information about both student loan entrance counseling and expected debt burdens.
We were particularly interested in the following questions:
- Who remembers their loan counseling and benefits from it?
- How does it affect expected student loan debt burden and the anticipated ability to repay that debt?
- What do students think would make the counseling better?
The data showed that 71 percent of students who participated in the NSFWS remembered their student loan entrance counseling. Of these students, only 16 percent found it helpful in general.
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Looking at students’ family backgrounds and experiences yielded a key insight. The students who found counseling helpful were more likely to have parents who emphasized money management, to have received an allowance as a teenager and to have previously participated in a financial education session or workshop.
In other words, the students most likely to benefit from student loan entrance counseling were the students who already had some exposure to financial socialization and education—not necessarily the students who needed counseling the most.
We also found evidence of statistically significant relationships between effective student loan entrance counseling and financial behaviors. Our results indicate that effective entrance counseling can contribute to increased borrower financial knowledge, which in turn increases both the borrower’s financial confidence and ability to apply that knowledge to make better borrowing decisions. This increased confidence and ability was also associated with better money management practices, which is associated with reduced student loan debt expectations.
Making the system better
In our third area of focus, we looked at who among student borrowers anticipated having difficulty paying off their student loan debt after graduation. Student borrowers with increased odds of anticipating repayment difficulties included female students; black, Latino or Asian students; first-generation students; and lower-ranked students.
Those who held larger amounts of student loan debt also were more likely to anticipate repayment difficulties, as were students attending a community college or four-year private college. A student borrower’s major was a factor as well; those majoring in STEM, business, health sciences or other majors were less likely to anticipate repayment difficulties than those majoring in the humanities.
When we asked the student borrowers what would make the loan entrance counseling experience more useful, several key themes emerged:
- They want information communicated more clearly, simply and plainly.
- Greater personalization would help, with examples, samples and scenarios relevant to their own lives.
- Students also need information delivered differently. The current module only requires passive participation, but they would prefer greater interactivity, or a live session conducted one-on-one.
- Spreading out challenging topics over multiple sessions would help as well.
- Learning tools such as step-by-step guides, worksheets and charts would be useful, as would quizzes or tests to verify understanding.
One-size-fits-all doesn’t work
Here are my key takeaways from these findings. First, the existing DOE loan counseling modules do help educate student borrowers—particularly those with existing financial literacy. However, the modules do not help all borrowers. They should be updated to reflect evolving student demographics and needs. A one-size-fits-all approach isn’t sufficient in today’s higher education landscape.
For example, traditional students usually have months to work through student loan materials and counseling. Students outside of the 18- to 24-year-old range, however, can be admitted and finalizing their student loans within a few weeks. This group may need an expedited version of the modules and/or versions tailored to different life stages.
Additionally, completion of the DOE modules should no longer be the minimum amount of financial education required to take out student loans. Between entrance and exit counseling exists a significant gap. As institutions of higher education, we can help fill that need. We should create broader opportunities to engage, educate and support students on financial health and literacy throughout their educational journey.
At Maryville, for instance, job placement is a vital part of the conversation on financial health, and our efforts have yielded a 97 percent job placement rate. Employment is the ultimate outcome that our students are working toward, but it’s also fundamental to fulfilling student loan obligations. At the institutional level and beyond, solutions to build financial health must include job placement.
Powerful incentive
The prospect of overhauling—or supplementing—the DOE modules may feel daunting, with ongoing budget crunches and competing priorities. However, there are ripple effects for colleges and universities that have both short-term and long-term impacts.
All institutions have one powerful short-term incentive to support students’ financial literacy, particularly as it relates to loan counseling. A school’s cohort default rate (CDR) represents the share of federal student loan borrowers who default before the end of the third fiscal year after they began repayment. If a school’s CDR reaches 30 percent or more for three consecutive years, it risks losing its ability to offer federal student loans and Pell Grants.
In the long term, it is our responsibility to help students cultivate their financial health as a core part of our mission to prepare and send them into the world with the best chance of success. It matters to their quality of life. It matters in terms of how the world perceives our reputation and priorities. And, it matters in terms of demonstrating the continued value of the education we provide.
Somer Anderson is a CPA, an Assistant Dean for the Simon School of Business at Maryville University and an Assistant Professor of Accounting.
