Picture a 1,000-piece jigsaw puzzle of the solar system. Completed, it's a beautiful picture of a starry night sky that evokes mystery and promise. Incomplete, it's a seemingly endless pile of similar-looking black and white pieces, presenting a daunting and often frustrating challenge to assemble.
Those who have been on the borrowing end of student loans can probably relate to this image. Taking out a loan to finance the dream of higher education should be pretty straightforward. Unfortunately, with all the bits and pieces of detail that borrowers get about their loans, it's easy for them to be puzzled about how much they owe. As a previous student loan borrower, current parent loan borrower, and someone who has worked in financial aid for several years, I have both personal and professional experience with student loan borrowing. If I feel confused about my education debt, I think it's reasonable to assume inexperienced borrowers do, too.
A big part of the problem is the overwhelming amount of paper borrowers receive. For example, in the past academic year alone, my family has received easily over 50 pieces of loan-related mail—an average of five mailings per month over 10 months. If you take out my monthly PLUS Loan billing, that still leaves about 40 non-billing related loan mailings, including Promissory Notes, Notices of Loan Disbursement, Quarterly Interest Statements, Account Statements, Interest Rebate Notices, etc. And that's just from the U.S. Department of Education. The school that my daughters attend (fortunately, they attend the same state university) also sends loan-related material. Just reading this information is time-consuming, let alone processing it mentally to figure out what action, if any, must be taken.
Despite the vast amount of loan detail my family has received, if you asked my daughters (a sophomore and a senior) what the total amount of their borrowing is today, I'm certain they wouldn't have a clue. And while I may have an educated hunch, without sitting down, sifting through, and adding up several pieces of the puzzle, I'm not really sure either.
This obliviousness on the part of borrowers is no surprise to researchers or to financial aid practitioners. Recent studies have pointed out that most students don't fully comprehend how much they've borrowed, especially related to interest accrual. For example, the U.S. Public Interest Research Group (PIRG) Higher Education Project found that nearly 80% of students recently surveyed underestimated the total cost of their student loans. In a series of debt management focus groups conducted nationwide, USA Funds found a prevailing trend of "information disconnect" between students' understanding and the reality of their total debt.
One logical solution to this disconnect, it might seem, is to provide more information. However, instead of more, what borrowers need is better information that provides—on a regular basis—the current, total amount of their education loan debt.
No wonder many students (and parents) are clueless about what they've borrowed. Instead of receiving a regular statement giving total loan amounts, they receive several similar-looking pieces of the total—like several disbursement notices, each showing one-half of one loan, minus fees. It gets even more cumbersome when, in the same academic year, a student borrower has both a subsidized and an unsubsidized Stafford Loan, or a parent borrower has PLUS Loans for more than one child. They can receive multiple disbursement notices. And, if a borrower increases a loan amount after the original loan is made, another notice. Adding up the bits of disclosure notices to get a total borrowing amount—for that one year—can feel like rocket science!
With all the technology tools available today, it would seem that providing the big picture about a borrower's total indebtedness should be fairly easy to do, but it isn't. Part of the problem, we know, is that students can have multiple loans from federal and nonfederal sources. Databases like the National Student Loan Data System (NSLDS) and National Student Clearinghouse have helped centralize federal loan data, but that's only part of the picture.
Another downside to the current data systems is the timing and method of informing borrowers about their student loan debt. For example, data stored by the NSLDS are reported directly to students only once a year, buried on the back of their Student Aid Report. Students can access their loan information online more frequently, but they need to initiate the information request and provide a PIN.
The information gap is most acute for student borrowers during their in-school years, before they enter repayment. Ironically, this is when students receive the least information about their cumulative debt (although they get plenty of disclosure "bits"), and they're simultaneously making decisions about how much more to borrow. How can we expect students to make good decisions about future borrowing if they're not adequately informed about their current debt level? Since parent (PLUS) borrowers enter repayment sooner than students, they receive billing statements sooner that list total debt levels for individual loans but, unless loans are consolidated, the debt picture for parents is also piecemeal.
What's needed is a more systematic approach to delivering total student loan information directly to borrowers on a regular basis, without their having to request it.
This may seem like bending over backwards for the borrower, but it's really not. If you think about other forms of consumer debt, like credit cards, mortgages or even utilities, a consolidated, monthly statement of total spending activity is not so far-fetched. If consumers had to go online each month to retrieve this information, it's pretty likely more than a few of us would fall behind on our bills and miss the mark on how much we owe.
Until our industry can figure out how to provide a consolidated statement of education borrowing—admittedly no small task—students and parents will have to continue piecing together the puzzle of their total loan debt.