Feds To Help Students Make Better Student Loan Decisions

The Consumer Financial Protection Bureau (CFPB), created by the Dodd Frank Financial Reform Act, has set its sights on student loans as one of its first major areas of consumer protection.

The new agency is teaming with the Department of Education to launch a new a program called Know Before You Owe, aimed at creating a ”financial aid shopping sheet,” which colleges and universities could use to help students better understand the type and amount of aid they qualify for and easily compare aid packages offered by different institutions.

The draft shopping sheet – a model financial aid disclosure form – makes the costs and risks of student loans clear upfront, before students have enrolled, outlining their total estimated student loan debt and monthly loan payments after graduation.

Better informed decisions

The objective is to reduce the number of students who emerge from colleges and universities saddled with massive debt. Also, to reduce the number of students like recent University of Phoenix graduate Theresa, of Irvine, Calif., who has a case of graduate's remorse.

“I received a Bachelors Degree in Business Administration,” Theresa told ConsumerAffairs.com. “The potential employers do not view University of Phoenix a scholastic institution. My degree is worthless in the business world. The college credits will not transfer to other institutions. And I have a student loan debt of over $30,000.00. The time and money spent to obtain what I considered one of the biggest achievements were all wasted.”

“Student loans are one of the best examples of how credit can make lives better and help people achieve the American dream,” said Raj Date, Special Advisor to the Secretary of the Treasury for the CFPB. “But in these tough economic times, the stakes have never been higher for students and their families to clearly understand the costs and risks of student loans. Having a simple, one-page financial aid shopping sheet would help students compare offers and choose the one that’s right for them.”

Surpassing credit cards

Student loans have now surpassed credit cards as the No. 1 source of U.S. household debt outside of mortgages. In part, this is because more students are accessing higher education. But it’s also because tuition is increasing.

At public colleges, tuition and fees are increasing by an average of 5.6 percent per year beyond the rate of general inflation. While federal funding for Pell Grants and education tax credits has kept net prices – what students ultimately pay after grants and scholarships – relatively steady, many students are covering these rising tuition costs by taking on more debt.

The complex and confusing financial aid process can make it difficult for students to understand college costs, evaluate loan options, and figure out how much debt to take on. Currently, prospective students too often receive jargon-laden financial aid award letters using inconsistent terms and calculations, making it hard to compare them side by side.

Information about the total debt, interest, and monthly payments of student loans may not be clear or may not be included at all. This may be an important reason why many students are choosing higher-priced private loans before exhausting subsidized federal loan options. Or students and their families may resort to credit cards and other debt products when better options are available.

To ensure that the financial aid shopping sheet is helpful to students and their families, the CFPB is putting it online and will provide the public with an opportunity to rank items in order of usefulness. The CFPB and Department of Education will use the feedback on this draft version to improve the shopping sheet. The Department of Education plans to publish a model form that schools could use to provide clear student loan and financial aid information to prospective students.