Last week, the U.S. Department of Education (Department) announced that they are expanding the Office of the Ombudsman to include consumer education, creating the new Office of Consumer Education and Ombudsman. The office has been tasked with improving financial literacy before students take on debt.
This is a welcome change, as many advocates have been calling for financial literacy initiatives, especially for those in college prep mode. One of the first times a student interact with debt is through the federal student aid process. A challenge for the Department if the proactive approach they hope to implement.
Why Financial Literacy Matters for College Students
Student loan debt is often one of the first major financial decisions a student will make as an adult. With the average student loan balance for borrower over $30,000, it’s crucial to understand the impacts of the debt on your financial future.
Key concepts every student should understand:
- The actual cost of borrowing money – interest is the daily cost of borrowing money, and it means you will pay back more than you borrowed, sometimes significantly more over the life of the loan.
- Debt is deferred payment – student loans are real money, which have interest costs and potentially other fees, that you will eventually be required to payback. While you’re in school you can defer the responsibility, but this means you will push the payments into the future when you may have other responsibilities, like rent, car payments, and daily living expenses.
- Payment habits matter – developing strong repayment habits is incredibly important. If you develop the habit to prioritize your debt and the repayment of your debt, you can build solid financial habits for your entire life.
- “Interest math” – this is just as important to understand as any other type of lifestyle math. Not only is interest the cost of borrowing a loan, but it can come in different forms. Interest can be calculated using the simple interest or compound interest formula. It’s important to understand the distinction.
Parents and Financial Literacy
Students aren’t the only ones who should review the concepts of financial literacy. Parents who plan on borrowing student loans to help their child should be aware of the options, the costs, and borrower benefits offered by each type of loan. Many parents opt for the Parent PLUS Loan offered through the federal student loan program. But many parents aren’t aware of the interest rate, the origination fees, and the repayment options in this program. In addition, many parents also opt to be a cosigner believing they are just helping their student obtain a loan. However, being a cosigner is essentially the same as being a co-borrower. While your student is the primary borrower, if they are unable to pay, you are required to pay back the loan.
How Federal Student Loans Are Different
Federal student loans are a bit different than other types of consumer debt. Unlike car loans, student loans are unsecured, meaning, there no physical asset a lender can take if you don’t pay.
The are some advantages to federal student loans, but there are also some challenges with this type of debt. Some of the borrower benefits offered in the student loan program include flexible repayment, options for loan payment postponement, forgiveness programs, no credit credits on most loans, lower interest rates when compared to other loans, and if needed, options to get the loan out of default. Some negatives include interest rates which may not be competitive with current rates—more specifically with the Direct PLUS Loan, origination fees, and debt that is difficult to discharge through bankruptcy.
Challenges the New Initiative May Face
While the expanded focus on proactive financial literacy is welcome news, the Department have significant hurdles to implementing an effective program. The recent layoffs, which included some borrower complaint teams, raise questions about the office’s ability to take on the new initiative. And while there have been financial literacy efforts throughout the years at the Department, a proactive initiative will require substantial resources and staff to be effective.
One of the biggest challenges is going to be engagement. Most student do not interact with the Department until it’s time to complete their FAFSA®. When they interact, they are typically high school seniors juggling college applications, scholarship searches, and other senior year activities.
With that being said, the hope is the Department will use multiple channels to get in front of students and families. They have their StudentAid.gov website, the option to integrate financial literacy in their online FAFSA, and social media. In the past we have seen their Financial Awareness Counseling Tool (FACT) available in the student’s StudentAid portal, and other online resources. And today, there are still Entrance and Exit Counseling requirements for students who borrow federal student loans. It will be interesting to see the new approach and how successful they will be with their intended audience.
What This Means for You?
If you’re preparing for college, there is no reason to wait for the new government initiative to take off. It’s time to get informed about the ways to pay for college, financial literacy, and money management.
If you are unsure about your college budget, it’s a great time to start talking to family members and counselors who will be helping you on your journey. And it’s never too late to start looking for scholarships, to help reduce your overall costs.
The Department expanded proactive financial literacy outreach efforts will be a great step to help inform students about the costs of an education, and the costs of borrowing money. While the initiative may face challenges, the hope is that they find a way to get this necessary information to students and their families.