With over two-thirds of current students taking out student loans and current student loan debt at $1.5 trillion, getting a handle on the student loan debt crisis is critical.
The Financial Literacy and Education Commission was created with the goal of determining best practices for helping students make decisions about college choice, degree choice and how to pay for their education.
In addition to stating that all colleges should offer financial literacy courses, one of the major recommendations concerns debt letters. Let’s look at the history of debt letters, what the commission recommends, and how iGrad’s new debt letter feature can help.
The History of Debt Letters
The United States first began offering government-backed student loans after enactment of the 1958 National Defense Act. These initial loans were only given to students in specific degree programs, typically those related to science and education. In the 1960s, these loans were extended to more degree programs under the Higher Education Act of 1965.
In 1994, federal regulations began requiring that all students receiving government loans be provided with both entrance and exit loan counseling to help borrowers understand their obligations and responsibilities.
Current Student Loan Counseling Requirements
The specific counseling has changed throughout the years as regulations changed. Current loan counseling1 now must include certain information that is shared with the student prior to starting freshman year, and prior to graduation.
Entrance counseling must include:
- The importance of repayment even if the borrower does not receive a billing statement, and even if the borrower cannot find employment
- The consequences of defaulting on a loan
- Explanation of a Master Promissory Note (MPN) and how it is used
- Sample monthly repayment amounts
- Availability of state grant aid
Colleges are also encouraged to include:
- A review of the terms and conditions of the loan,
- Repayment options
- How much they can afford to borrow
- Explanation of forbearance, determents, and cancelations
- Borrower rights and responsibilities
- Policies affecting withdrawals
- Good loan record keeping
Exit counseling must include:
- A review of all information given during entrance counseling
- The student’s average monthly repayment amount
- Repayment options
- Debt management strategies
- Forbearance, deferment and cancellation options
- How to find loan information
- How to reach the ombudsman’s office if they have student loan issues
- How to update personal information
Additionally, it is recommended that students receive lender information and instruction on completing deferment forms.
Unfortunately, based on a NERA and YI survey in 2012,2 over 66 percent of borrowers didn’t understand their loans. In fact, the survey showed that 40 percent of students stated they had not received any counseling about their loans. Of those who did recall receiving counseling, 41 percent stated that it was uninformative.
Current Debt Letter Recommendations
Because of such statistics, many people advocate for student debt letters, which provides loan summary information and reiterates the information required to be disseminated during the entrance and exit counseling sessions.
Even though 12 states now require such letters, there is no federal law mandate.
The commission noted that some educational institutions already issue debt letters. These letters help students understand how much they need to repay, seek financial counseling and prepare for financial decisions after college.
The commission said college debt letters should:
- Provide relevant information including current borrowing levels for both federal and private loans, estimated repayment amount with various repayment programs, tuition plan options, accrued interest when payments are deferred, average borrowing levels among peers and average entry-level salary for student’s major
- Tell students how to access additional information
- Be sent to students prior to registration and/or before the financial aid deadline.
- Offer other financial literacy strategies
Indiana University: A Debt Letter Example
The commission recommends that colleges send debt letters because of the positive outcomes reported by those already do so.
Indiana University3 was one of the first to issue debt letters, beginning in the 2012-2013 academic year. That year, Stafford loans dropped 11 percent, more than five times other four-year public schools.
In addition to the letters, Indiana University also added:
- Personal finance courses
- Peer-to-peer advising
- Access to more financial aid information on their website
- Confirmation that returning students want to continue to take out loans
The university’s successful results led to the first two states requiring debt letters to all students taking out student loans.
iGrad’s Debt Letter Template
iGrad agrees that debt letters, along with counseling and financial literacy, will help students make better financial choices and be less likely to graduate with overwhelming student loan debt.
This new iGrad student loan debt letter template, which meets the current requirements for the 12 states mandating debt letters, can be sent out via mail or email. In addition to providing a current balance and projected monthly payments, it also provides links to educational resources such as how to access their full student loan information on the National Student Loan Data System, articles, videos and financial literacy courses. iGrad recommends that schools sent out the debt letters after every loan disbursement, which is typically twice a year.
To see how iGrad can help your students manage their finances and student loan debt, check out our demo video here.