More Financial Education

Along the lines of Kevin’s post below about financial literacy, NPR’s Morning Edition aired a story yesterday about a pastor who’s stuck in the never-ending cycle of default and repayment on his student loans. The pastor took out $15,000 in loans in 1984, owes nearly twice that amount now, and will still be repaying them in 2029. Since I’ve started doing work on student loans, I’ve heard many stories like this.

When most students are taking out loans, no one is there to counsel them on the salary they will need to make the minimum payments, or even to warn them of the serious financial consequences of defaulting on the loan. In my experience, getting over $30,000 in loans is as easy as signing a few pieces of paper, with absolutely no discussion of your plans for future income and only minimal loan counseling (an online ‘class’ that you can complete without even reading the information).

A student who defaults on their loan can see the amount they owe grow exponentially. Each time the borrower defaults, an 18.5% collection fee is added to their loan balance plus any accrued interest. If a borrower defaults multiple times, the loan balance can easily double. This increase is enough to ensure that many of these borrowers will never be able to repay their loans.

Current legislation includes both income-based repayment, which helps borrowers to stay out of default by pegging payments to their income, and loan forgiveness for borrowers working in public service fields. Both of these will likely help students in the future avoid the financial devastation of defaulting on their loans. But for the borrowers who do default, we need to address the punitive nature of how student loan defaults are handled, and find a better way to both encourage personal responsibility and also provide a means for these borrowers to repay their debt and recover financially.

(This comic is all too appropriate, but the reality is that it is not a joke for a lot of people.)