A recent analysis by the California Policy Lab and the Student Loan Law Initiative1 shows that the student loan pause was beneficial for most students. In fact, they found that as a result of the pause:
- Debt obligations lowered an average of $210
- Credit scores rose an average of 28 points from 640 to 668
- Borrowers reduced credit card use – 44% of borrowers reduced usage by 23%
Although this is good news, the study also found that many borrowers will be in trouble when payments begin again.
Most federal student loan borrowers (85%) have other debt averaging $19,121.
Because of this debt and past performance with student loans, the study projects that 28% of borrowers (7.8 million people) will miss payments. Another 24% who do not exhibit clear credit report patterns may also be at risk due to the lasting financial effects of the pandemic.
Because of this, financial aid directors need to begin preparing students now for when student loan repayments begin again in August. Here are six things to consider.
#1: Beef Up Entrance Counseling
Student loan entrance counseling is mandated by law, so students must complete some counseling in order to borrow federal loans. But how effective is your entrance counseling?
According to one study2, many students graduate without understanding their loans.
The study found that:
- One-third of students do not remember getting entrance counseling.
- Students found the counseling to be too technical.
- Students want a more interactive and user-friendly experience.
- It’s too easy to take an online exit counseling class without actually retaining any of the information.
- Students would like to have monthly or quarterly communications about the topics learned in the entrance counseling during their entire time on campus.
Financial Aid Directors should make sure that their entrance counseling includes all the topics required by the federal government, including types of student loans, strategies for borrowing wisely, proper money management, and repayment of student loans.
To make this course more meaningful, directors may consider:
- Adding multimedia to increase knowledge retention
- Including more infographics and other easy-to-assimilate information
- Providing tools to see how different loan amounts will affect the student
- Reaching out to students on a more regular basis with “reminders” about various aspects of student loans
- Helping students determine post-graduation salaries for their field of interest
#2: Exit Counseling
Like entrance counseling, exit counseling is required by law. And, like entrance counseling, exit counseling may not be seen as valuable by your graduating class.
One study3 found that:
- No students remembered the financial information presented during the exit counseling
- No students were worried about repayment or default after participating in exit counseling
Students need to understand and retain the information provided because as many as one out of ten borrowers have defaulted on a student loan4.
Financial aid directors can follow similar best practices for exit counseling, ensuring the information is easy to understand and seen as valuable to students.
Additionally, they need to make sure that the counseling helps students understand that many repayment plans are available, how to determine which repayment plan is right, and what measures they can take to prevent default.
Financial aid directors should:
- Ensure that all students complete exit counseling.
- Continue communications post-graduation or post-attendance, especially during the six-month grace period.
- Consider contacting students as they near the end of the grace period to determine if they need help restructuring their loan, learning about repayment options, or qualifying for deferment or forbearance.
#3: Working With Other Departments to Increase Completion
The Protecting Colleges and Students report5 found that one of the best ways to prevent default is to help students complete their program of study.
According to their research, nine percent of students who graduate default on their loans compared to 33% for students who leave without completing their studies.
It makes sense for Financial Aid Directors to work with other departments to help ensure completion rates. These include such things as:
- Creating and providing “student success” courses for students who are not prepared (first-generation college students, minorities, ESL students, etc.)
- Requiring campus orientations to help students adjust to campus life
- Creating an alert system that identifies students struggling with their studies
- Helping students pick classes that pertain to their field of study so that each class counts toward completion
#4: Communicate Necessary Student Actions
In order to repay loans in a timely manner, students need to be involved with their loan servicer.
Help students understand what they need to do through monthly communications. These communications should help students:
- Know how to find their loan servicer
- Keep contact information up-to-date
- Create an auto-debit or restart their auto-debit
- Understand that auto-debit will reduce their interest rates by 0.25%
- Be on the lookout for emails and letters on student loan payment updates from the US Department of Education
#5: Educate Students on Student Loan Scams
Student loan scams are on the rise.
Many students with student loans receive phone calls, texts, emails, and letters offering student loan debt relief or student loan forgiveness. In many cases, these are scams.
Help students understand that any communication from the Department of Education or its partners will not be aggressive or use “act immediately” or “first come, first served” type advertisements.
Financial aid directors can help students understand the signs of a scam:
- Require fees up-front or monthly
- Promise total loan forgiveness or cancellation
- Want your FSA ID username and password
- Want you to sign a power of attorney to speak to your loan servicer on your behalf
- Claim the offer is limited
- Communications are grammatically incorrect or contain spelling errors
They can also help students understand that their loan servicer will provide free help and where to get that help
#6: Provide Financial Aid Tools
Finally, financial aid directors can provide financial tools for students and alumni to help them understand their loans and all aspects of personal finance. Such tools include:
- An award letter analyzer: Helps analyze the direct and indirect costs of college and compares the different financial aid awards
- Scholarship search
- Student loan snapshot: Helps students know how much they owe, what their repayment will be, and which repayment plan is best
- Financial wellness program: A financial wellness program, like iGrad, can provide students and alumni with classes on financial aid and courses and information about all aspects of personal finances.
1 - https://www.insidehighered.com/quicktakes/2022/03/23/study-impact-student-loan-pause
2 - https://www.consumerinterests.org/assets/docs/CIA/CIA2017/CIA%202017%20Bartholomae%20Anderson%20Dorius%20Fox%20Heckman%20Jorgenson%20Letkiewicz%20Montalto%20SY.pdf
3 - https://dr.lib.iastate.edu/server/api/core/bitstreams/35eff56e-0975-4e81-ae2f-3d2fa269466c/content
4 - https://educationdata.org/student-loan-default-rate
5 - https://ticas.org/files/pub_files/Protecting_Colleges_and_Students.pdf