student loans: what financial practitioners need to know
TRANSCRIPT
Student Loans: What Financial Practitioners Need to Know
https://learn.extension.org/events/2161
This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Family Readiness Policy, U.S. Department of Defense under Award Numbers 2012-48755-20306 and 2014-48770-22587.
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Student Loans: What Financial Practitioners
Need to Knowhttps://learn.extension.org/events/2161
Barbara O’Neill, Rutgers UniversityCarrie Johnson, South Dakota State University
Elizabeth Coogan, Federal Student Aid, U.S. Department of Education
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Student Loans: Impact and Options
Dr. Barbara O’Neill, financial resource management specialist for Rutgers Cooperative Extension@moneytalk1
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What We’ll Discuss Today
• Student loans are making a financial burden on families.• Educating borrowers on repayment terms is an important
step in reducing loan burden.• Student aid repayment options and terms are ever-
changing.• Borrowers can get help, but often don’t know where to
turn.• Financial educators can help fill the knowledge gap.
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Student Loan Overview: Two Big Concerns
• Increasing frequency of use by students– Going to college effectively means going into debt for
a majority of American college students
• Increasing outstanding student loan debt burdens– College graduates– Those who do not complete a degree program and
lack an income boost to help repay debt
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College Tuition, Medical Care, Gasoline, Shelter, Consumer Price Index (CPI)
The cost of higher education has surged more than 500% since 1985.
This 2013 chart shows that tuition expenses increased 538% in the 28-year period, compared with a 286% jump in medical costs and a 121% gain in the consumer price index. Increasing costs have increased demand for educational loans.
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Source: Federal Reserve Bank of New York via NPR’s Planet Money:
http://www.npr.org/sections/money/2012/04/18/150909686/what-america-owes-in-student-loans
Auto Loans, Credit Card Debt, and Student Loan Debt:
Which is Larger?
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Americans Owe More on Student Loans Than for Car Loans or Credit
Cards!
Source: Federal Reserve Bank of New York via NPR’s Planet Money:
http://www.npr.org/sections/money/2012/04/18/150909686/what-america-owes-in-student-loans
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Updated Figures: September 2015
• Student Loans : $1,350,618,677,650.00
• Credit Cards: $882,600,000,000.00
• Auto Loans: $750,000,000,000.00
Source: The Student Loan Debt Clock: http://collegedebt.com/
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College is Expensive!• 2003-2013: State funding for colleges decreased by 12%
and median tuition rose 55% across all public colleges
• Students have two methods of elasticity in response to increased college costs
– Select a lower cost college to attend
– Graduate with more student loan debt
Source: Higher education: State funding trends and policies on affordability (December, 2014). Washington, DC: Report to the Chairman, Committee on Health, Education, Labor, and Pensions, United States Senate. U.S. GAO. Retrieved from http://www.gao.gov/assets/670/667557.pdf.
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According to the College Board: • A "moderate" college budget for an in-state public college
for the 2014–2015 academic year averaged $23,410
• A moderate budget at a private college averaged $46,272– Includes tuition, fees, housing , meals, books and supplies,
transportation expenses, and personal expenses
http://www.collegedata.com/cs/content/content_payarticle_tmpl.jhtml?articleId=10064
How Much Does College Cost?
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•Scholarships: “Free money” (merit-based)
• Grants: “Free money” (need-based)
• Work Study: Earned money from a job
• Student Loans: Borrowed money
https://studentaid.ed.gov/sa/types/grants-scholarships
What Type of College Financial Aid is Available?
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• Federal Perkins Loan
• Direct Subsidized & Direct Unsubsidized Loans
• Direct PLUS Loans
• Direct Consolidation Loans
https://studentaid.ed.gov/sa/types/loans
Federal Student Loans
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Unsubsidized• Interest starts accruing from
the time the funds are disbursed
• Student is responsible for paying all interest
Subsidized• The Federal Government pays
interest while student is in school and during grace and deferment periods
The Difference Between Subsidized and Unsubsidized Student Loans
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Federal Loans
• Do not have to pay back loans until graduation, leave school or go less than half time
• Interest rates are fixed
• No credit check
• Entrance and exit counseling
Private Loans
• Many loans require repayment while still in school
• Can have variable interest rates as high as 18%
• May require an established credit record (e.g., a cosigner)
• No counseling
• Can have higher fees and shorter repayment terms
Federal vs. Private Loans
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Student Loan Statistics• In 2010, total outstanding student loan debt rose to over $800
billion, overtaking credit card debt for the first time, as well as auto loan debt (only mortgages have a higher debt total): https://www.aeaweb.org/articles.php?doi=10.1257/jep.26.1.165
• Average amount of debt owed by graduating students in 2013 was $28,400: http://ticas.org/sites/default/files/legacy/fckfiles/pub/classof2013.pdf
• In 2012, 71% of all students graduating from 4-year colleges had student loan debt: http://ticas.org/sites/default/files/pub_files/Debt_Facts_and_Sources.pdf
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More Student Loan Statistics• Average cumulative debt of bachelor’s degree recipients
increased – 9% between 2002-03 and 2007-08 school years
– 24% between 2008-09 and 2012-13 school years
– Graduates of for-profit colleges have higher amounts of debt than those of public and private non-profit colleges
– http://trends.collegeboard.org/student-aid/figures-tables/average-cumulative-debt-bachelors-recipients-public-four-year-time
• The monthly average student loan payment (2010 SCF data): $242– http://www.brookings.edu/research/papers/2014/06/19-typical-student-loan-
debt-akers
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Generation IndebtedStudy (Houle, 2014) of young adult debt across three age cohorts: http://www.jstor.org/stable/10.1525/sp.2014.12110?seq=1#page_scan_tab_contents
Key findings:• Debt burdens (debt relative to economic resources) increased substantially across
the three cohorts of study.
• Young adult debt portfolios shifted towards non-collateralized (unsecured) and student loan debt over time, the latter replacing home mortgage debt as the primary form of wealth-building debt among young adults.
• Cohort changes in debt have occurred unequally across social class lines. Young adults from lower social class backgrounds have disproportionately taken on more unsecured debt over time, relative to their more advantaged counterparts.
• The growth in debt burden across cohorts has been most pronounced among college-educated young adults.
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Student Loan ImpactsOn Students
• Opportunity costs (e.g., “crowding out effect”)
• Postponed savings, reduced wealth accumulation
• Emotional distress
• “Living a postponed life” (marriage, family)
• Career choices
• Stifled entrepreneurship
On Society
• Reduced/delayed home and auto purchases
• Decreased/delayed family formation
• More young adults living with parents and impacting parents’ finances
• Lifetime wealth loss impacts (money that isn’t available to be spent or invested)
• Stifled entrepreneurship
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Consequences, Research and Repayment
Dr. Carrie Johnson, State Family Resource Management Specialist, South Dakota State University @SDSUExtFinance
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• Entire balance of loan may be immediately due and payable• Loss of eligibility for deferment, forbearance, and repayment plans• Loss of eligibility of additional federal student aid• Loan account assigned to a collection agency• Federal and state tax refund withheld through tax offset• Federal salary offset (federal government employees)• Loan holder can take legal action against borrower• Student loan debt will continue to increase• Wage garnishment• Damage to credit history
Many Negative Consequences from Student Loan Default
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Taken Together, All of the Data on the Previous Slides Beg the Questions…
• What were students and/or their parents thinking when they made student loan decisions?
• Did they fully understand the implications of their student loan borrowing decisions?
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NC 2172• Multi-state research group composed of Extension
specialists and teaching/research faculty:
• 10/1/13-9/30/18 research theme: Behavioral Economics and Financial Decision-Making and Information Management Across the Lifespan
– In other words, how do households make financial decisions?
• Results will inform efforts to improve financial decision-making
• Three research topics: decisions about funding education (student loans), retirement , and housing
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Student Decision-Making Cycle
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Student Loan Research: Experimental Design
• Purpose: To measure participants’ attitudes and willingness to take on student loans
• Online respondents were presented with a scenario describing a young person who is deciding to either attend college or go straight into the workplace
• Three different treatments were tested to determine if additional information presented as a treatment (e.g., return on educational investment) affects their determination of the prudence of borrowing
• Participants were randomly assigned to one of three surveys (treatments vs. control by Survey Sampling International (SSI)
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Student Loan Research: Focus Group Study
• Purpose: To understand decisions that students made with regard to college selection and student loan borrowing
• Three rounds of data collection: two campus-based samples and a sample via SSI
• Data collected via an online course platform that enabled students to “talk” with one another
• Rich qualitative data indicating students’ decision-making processes, knowledge, thoughts, and emotions about student loans
• A journal article reporting research results is under review
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Focus Group Questions• Question 1: How did you decide which colleges or universities to
attend?
• Question 2: How did you feel about borrowing money for college?
• Question 3: What assistance/sources of help, if any, did you use before making the decision to take out a student loan?
• Question 4: Tell me what you know about your loans.
• Question 5: How do you think your student loan debt will affect you economically after graduation?
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Focus Group Questions
• Question 6: What factors influenced your decision to accept the type of financial assistance you are using?
• Question 7: How has the amount of financial aid you’ve requested/received affected the number of college credits for which you’ve enrolled?
• Question 8: Thinking back to a time when you received a student loan refund (i.e. borrowed funds remaining after tuition and fees were paid), tell us how you or someone you know, used those available funds.
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Focus Group Study Highlights• Key college selection factors: costs and state scholarship
availability
• Also close- but not that close- proximity to family
• Sense of resignation about loans (“a necessary evil”)
• Palpable worry and stress about debt owed
• Few knew more than 1-2 things about their loans
• Worry about the impact of loans on later life
• Mostly responsible use of loan refunds
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NC 2172 Team Student Loan Literature Refereed Journal Articles
Cho, S.H., Xu, Y, & Kiss, D.E.(2015, March). Understanding Student Loan Decisions” A Literature Review. Family and Consumer Sciences Research Journal, 43(3), 229-243. http://onlinelibrary.wiley.com/doi/10.1111/fcsr.12099/abstract
Examines theories related to student loan debt, effect of student loans on college education, and effect of student loans on post-school life.
Johnson, C. (2015, June). Understanding Federal Student Loan Repayment. Family and Consumer Sciences Research Journal, 43(4), 306-312. http://onlinelibrary.wiley.com/doi/10.1111/fcsr.12108/abstract
Explains the federal student loan repayment process
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eXtension Student Loan Resources Web Page
• Includes information about student loans, the Federal Student Aid (FSA) Financial Aid Toolkit, and other FSA resources
• Will eventually include NC 2172 research briefs
http://www.extension.org/pages/72895/student-loans
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Confusion About Repayment/ Consolidation
• Currently 8 Different Repayment Plans– Another one on the way
• For-profit companies promising to get student loans forgiven & reduce payments
• Not sure where to go for help
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Traditional Repayment Plans
Repayment Plan Monthly Payment Maximum Repayment Time
Additional Qualifications
Standard Repayment Plan
Fixed amount of at least $50 per month
10 years OR 30 years for Direct Consolidation Loan
Graduated Repayment Plan
Lower payments at first and increase (typically) every 2 years
10 years OR 30 years for Direct Consolidation Loan (depending on amount borrowed)
Extended Repayment Plan
Payments may be fixed or graduated
25 years • Loan balance must be more than $30,000
• Must be a “new borrower” as of 10/7/1998
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Income-Driven Repayment Plans
Repayment Plan Monthly Payment Maximum Repayment Time
Additional Qualifications
Income-Based Repayment Plan (IBR) for those who are not new borrowers on or after 7/1/2014
Maximum will be 15% of discretionary income (payments change as income changes)
Up to 25 years • You must have a partial hardship
• If not paid in full after 25 years of payments, loan will be forgiven
Income-Based Repayment Plan (IBR) for those who are new borrowers on or after 7/1/2014
Maximum will be 10% of discretionary income (payments change as income changes)
Up to 20 years • You must have a partial hardship
• If not paid in full after 20 years of payments, loan will be forgiven
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Income-Driven Repayment PlansRepayment Plan Monthly Payment Maximum
Repayment TimeAdditional
QualificationsPay As You Earn Repayment Plan (PAYE)
Maximum will be 10% of discretionary income (payments change as income changes)
Up to 20 years • Must be a new borrower on or after 10/1/2007 AND must have received a disbursement of a DL on or after 10/1/2011
• You must have a partial hardship
• If not paid in full after 25 years of payments, loan will be forgiven
Income-Contingent Repayment Plan
Based on AGI & family size (payments change as income changes)
Up to 25 years • If not paid in full after 25 years of payments, loan will be forgiven
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Income-Driven Repayment Plans
Repayment Plan Monthly Payment Maximum Repayment Time
Additional Qualifications
Income-Sensitive Repayment Plan
Monthly payment based on annual income. Payments change as your income changes
Up to 10 years • Only for FFEL program loans.
• Each lender’s formula for determining payment amount under this plan can vary
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Another One on the Way
• Revised Pay as You Earn Repayment Plan (REPAYE)– Payments capped at 10% of discretionary income– Forgiveness after 20 years (25 years for those with
graduate loans)– If monthly payment is less than the monthly interest,
the excess interest will be reduced by 50%– Married persons will have their spouses income count
towards their monthly payment, regardless of whether or not they filed taxes jointly or separately
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One More Item to Add Confusion
• Public Service Loan Forgiveness Program (PSLF)– Employed full-time by:
• Federal, state, local, or tribal government organization• Not-for-profit organization that are tax-exempt under
Section 501(c)(3) of the Internal Revenue Code• Other not-for-organizations that provide a qualifying
public service– Must make 120 on-time payments under a
qualifying repayment plan (all income-drive plans & Standard)
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Companies Offering Help
• Many ads by those offering assistance to borrowers to lower their monthly payments and/or get their student debt forgiven
• These companies do offer a service BUT after the initial consultation there is a fee (a lot of times substantial)
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Borrowers Really Don’t Know Where to Go for Help
• Financial Aid Offices typically do not deal with repayment. Their main job is to disburse student loans.
• They do send Entrance & Exit Counseling• There is a lot of information online, they may
not know what is “real” or not
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Free Resources• National Student Loan Data System (NSLDS): Find out
how much is owed in federal loans• Studentaid.gov: Tons of information regarding
federal student aid• Studentloans.gov: One-Stop Student Loan Shop
– Complete MPN’s– Complete Entrance & Exit Counseling– Choose Repayment Plan– Consolidate Student Loans– Repayment Estimator– Provide Annual Income Verification for Income-Driven
Plans
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Educating Borrowers: Best Practices
• Use their situation – not hypotheticals or examples– Have them log into NSLDS & studentloans.gov– Pull a free credit report
• Workshops should be done the year/semester they are leaving school
• One-on-one meetings are best way to really assist them in making decisions & follow-through
RESOURCES FROM FEDERAL STUDENT AID
Elizabeth Coogan, Senior Advisor, Customer Service Experience, Federal Student Aid , U.S. Department of Education@FAFSA
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Agenda
NEED • Introduction• Financial Literacy and Education
Commission• New FSA Financial Literacy Resources• FSA Borrower Surveys• FAFSA Changes• FSA Resources
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Introduction
NEED
Check out our video on Responsible Borrowing: https://www.youtube.com/watch?v=mTHtn0FRMWw
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http://www.treasury.gov/resource-center/financial-education/Documents/Opportunities to Improve the Financial Capability and Financial Well-being of Postsecondary Students.pdf
Financial Literacy and Education Committee
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Financial Literacy GuidanceFINANCIAL LITERACY GUIDANCE FINANCIAL LITERACY RESOURCEShttp://financialaidtoolkit.ed.gov/resources/fin-lit-guidance.pdf http://www.financialaidtoolkit.ed.gov/tk/resources/all.jsp
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About the New College Scorecard
Released Sept. 2015Designed to help students and families find the best fit for themReflects the input of thousands of students, counselors, institutions, researchers, and policymakers
collegescorecard.ed.gov/
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College Scorecard Data• The site emphasizes access,
affordability, and outcomes• Constructed of federally available data
(IPEDS and NSLDS)• Includes:
– Nationally comparable data on earnings– New median debt and repayment rate
figures– Data disaggregated by student subgroup
to aid institutions in understanding their outcomes
• Data are available as downloadable files, and via API
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GI Comparison Toolhttp://department-of-veterans-affairs.github.io/gi-bill-comparison-tool
Comparison Tool was launched on February 4, 2014, in response to Executive Order 13607 to implement and promote “Principles of Excellence.”
3Streamlines information into an easy-to-use online tool3Combines resources from more than 17 different web pages and three Federal
Agencies3Provides information to calculate benefits and research approved programs3Compares multiple schools3Displays school-level complaint data from the Feedback System3Displays Section 702 (in-state tuition provision of the Choice Act) school
approval information3Displays Caution Flag for schools listed on Department of Education’s
Heightened Cash Monitoring (HCM) list3Displays Military Tuition Assistance (TA) for schools offering tuition assistance
to service members
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Financial Awareness Counseling ToolExpenses Funds
Financial Awareness Counseling Tool (FACT) link: www.studentloans.gov/financial-awareness
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Repayment Estimatorstudentloans.gov
/myDirectLoan/mobile/repayment/repaymentEstimator.action
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Borrower Survey Information
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The Knowledge Gap
1. Where do students get their information on borrowing and repayment?
2. Do student borrowers understand their loan repayment options?
3. Once they complete or leave school, what do they wish they had done differently?
4. What are the characteristics of student borrowers who need this information the most?
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The Knowledge Gap: Sources of InfoStudents get most of their information on financial aid from their school’s financial aid office
Top 5 Ways Financial Information was Received %
Talking with financial aid counselors at your college or university 78%
Other online resources from your school’s office of financial aid 65%
Printed materials from your school’s office of financial aid 63%
Talking with friends or family about financial aid 59%
Talking with other staff or faculty at your school 52%
SOURCE: FSA survey of borrowers in school, 2014.
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The Knowledge Gap: Sources of InfoBorrowers in their grace period get most of their information on repayment options from their loan servicer and FSA websites
Top 5 Sources of Info on Repayment Options %
Online loan servicer account management 43%
Studentloans.gov website 27%
NSLDS website 19%
Phone number for loan servicer 17%
Studentaid.gov website 17%
SOURCE: FSA survey of borrowers in grace, 2013.
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The Knowledge Gap: ActionsWhen you first enrolled in school, you may have had an idea of how much you expected to borrow in student loans. Now that you are finished, did you end up borrowing more or less than you initially anticipated?
47%More
8%Less
22%About what I
expected17%
Not sure yet, con-tinuing
education7%Don’t
know/ not sure
SOURCE: FSA survey of borrowers in grace, 2013.
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The Knowledge Gap: SummaryStudents often borrow more than they expectedMany are not aware of the options for loan repayment other than the standard 10-year repayment planMany do not have enough information about income-driven repayment plansWithout enough information, it is hard for them to make an informed decision about repaymentCustomized tools exist to help them understand their options, such as the Repayment Estimator and FACTMany borrowers access the tools, but not all are aware of themFAAs have a window of opportunity while students are in school to ensure students have the info they need
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FAFSA
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FAFSA Changes Beginning with the 2017-2018 FAFSA application cycle, the FAFSA will be available on October 1 of the year preceding the year when the student will be attending college
The 2016-2017 FAFSA cycle will continue to begin in January (January 1, 2016)
Beginning with the 2017-2018 FAFSA, applicants will provide income information from the “prior-prior” year
The 2017-2018 FAFSA will collect 2015 income information and not 2016 information
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Here’s a summary…
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FSA Resources
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My Federal Student AidNEW
StudentAid.gov
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FSA Publications
studentaid.ed.gov/sa/resources
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Videos
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Infographics
http://visual.ly/users/federalstudentaid
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Financial Aid Toolkitwww.financialaidtoolkit.ed.gov
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Social Media Resources From FSA
FSA offers easy-to-use social media content and resources for you to use on your own site
http://financialaidtoolkit.ed.gov/tk/outreach/social-media.jsp
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Key Take-Aways• More money is owed on student loans than any type of
debt except mortgages• There are different types of student loans and repayment
options can be confusing.• The student loan repayment process is ever-changing.• Resources are available, but many borrowers are
unaware.• Educating borrowers about student loans is essential to
fill the knowledge gap.
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Contact Information:
[email protected]: @moneytalk1
[email protected]: @SDSUExtFinance
[email protected]: @FAFSA
Evaluation and Continuing Education UnitsThe Personal Finance Concentration Area offers 1.5 CEUs from AFCPE for AFC-credentialed participants and 1.5 CEUs from FinCert for CPFC-credentialed participants.To receive a Certificate of Completion to submit for CEUs, please complete the evaluation and post-test found at: https://vte.co1.qualtrics.com/jfe/form/SV_es19RuEGpbsGqDX*Must pass post-test with an 80% or higher to receive certificate.
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This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Family Readiness Policy, U.S. Department of Defense under Award Numbers 2012-48755-20306 and 2014-48770-22587.