In March, the Consumer Financial Protection Bureau (CFPB) began collecting public comments in order to understand the problems borrowers face with their private student loans. Last week, the CFPB released the nearly 2000 responses it received. One thing is glaringly obvious: the bureau has its work cut out for it. Too many students are making bad borrowing decisions because they don’t understand their options and are confused about the terms and conditions of their loans, or even whether their loans are federal or private.
For example, one borrower wrote:
I am the first person in my family to go to college. My parents didn’t graduate high school. We had no idea how to approach college. FAFSA was no help. It was stressful to fill out… I got a few government loans but I was forced to turn to Sallie Mae for the bulk of tuition. I simply cannot pay all these loans.
Applying for financial aid is complicated and confusing, particularly for first-generation students who often must navigate this process on their own. Did this borrower exhaust all of his or her federal student aid eligibility before taking on riskier private loans? We don’t know. But this example shows that without good counseling borrowers may choose private loans instead of federal, over-borrow, and potentially default.
Here are a few other examples of complaints that highlight the confusion surrounding student loans:
I was not eligible for federal student loans or student aid in any way because FAFSA is solely based on my parents income.
This is a common misperception. Unsubsidized Stafford loans are available to students regardless of financial need. Parent PLUS and Grad PLUS are also available to cover up to the full cost of attendance with low eligibility requirements. Additionally, middle- and upper-income students and their families may be eligible for the refundable American Opportunity Tax Credit.
I think we have all federal loans, but really, I don’t know. The info out there on how loans work, are awarded, and are repaid is so complicated that I have given up trying to figure it out. I know that we pay as much as possible out-of-pocket to minimize loans, then get loans through the school (all of them have PLUS in my name so I guess they’re federal?).
PLUS loans are federal loans that are available to parents of undergraduate students and to graduate students to help cover up to the full cost of attendance. They come, however, with higher interest rates than Stafford and Perkins loans and offer no grace period before repayment begins. Therefore, this borrower would have benefited from maximizing other federal loans available, such as unsubsidized Stafford, before taking out PLUS.
I applied for federal aid through FAFSA website. I filled out the application and was approved for a student loan… I was under the impression I was getting my student loan through the Utah higher education assistance authority. To my surprise my loans came from Great Lakes borrower service. I was misled about my lender.
Before July 1, 2010, students could receive federal loans made by private lenders under the Federal Family Educational Loan (FFEL) Program. Now, all loans are made through the Department of Education’s Direct Loan program. Many students don’t realize that they have a federal loan since it’s possible that the loan is held and serviced by the likes of Sallie Mae or Great Lakes on behalf of the Education Department.
Figuring out how to pay for college is a seriously complex process. Students need to be aware of the terms and conditions of their loans before they sign their promissory notes. But we can’t be complacent in thinking that all students are coming from the same place and have the same general understanding of student loans. For many students and families, a student loan is their first loan, and their unfamiliarity with loan vocabulary will add further mystery to an already opaque process.
More needs to be done to educate borrowers about financial aid. The recent FAFSA simplification and the proposed model financial aid letter are a helpful start. Overall, we need better financial counseling that will help elevate loan literacy for all borrowers, especially those unfamiliar with what borrowing really means.