How Indiana University Cut Student Debt

The more students know, the less they borrow

Troubled by an increase in student loan defaults, Indiana University decided to tell prospective borrowers what their monthly payment would be after graduation and how much they would owe. That information had a dramatic effect on students’ willingness to borrow: Federal undergraduate Stafford loan disbursements at the public university dropped 11 percent, or $31 million, in the nine months that ended March 31 from a year earlier, according to U.S. Department of Education data. “We are having more contact with the student where they can say, ‘I don’t want this’ or ‘I want less,’ ” says Jim Kennedy, associate vice president and director of financial aid at the Indiana system. “If they know at all times their debt and the repayment, it helps with a lot of planning.”

Studies have shown that many students, some as young as 17 when they first borrow, fail to understand loan terms and find themselves in financial straits when they have to begin repayment years later. A Federal Reserve Bank of New York report last month found that fewer than half of survey respondents with student debt had high “loan literacy.” Less than a third were aware that the government can garnish wages or tax refunds to recover defaulted debt. Federal law requires colleges to provide counseling to borrowers only at the beginning and end of their studies.

Natalie Cahill, 22, who is about to start her final year at Indiana’s flagship Bloomington campus, says that after receiving the letter she decided to search for more scholarships, and she will use earnings from a summer hospital job to help cover costs. “When you take out loans for the year, you just see a smaller number than the grand total,” says Cahill, who has taken out about $22,600 in loans. “Seeing the letter definitely put things into perspective.”

The level of education debt in the U.S., now $1.2 trillion, surpassed that of credit card debt four years ago. The most recent federal data show 14.7 percent of student borrowers defaulting during the first three years they are expected to make payments. That compares with 5.4 percent a decade ago, when the rate was measured over two years. Rising default rates at Indiana also sounded alarms among the university’s leaders, Kennedy says. On the Bloomington campus, the most recent default rate for students required to start repayment in 2010 was 6.4 percent, up from 3.4 percent a year earlier, according to Education Department data.

Indiana began sending the letters, mostly by e-mail, during the 2012-13 academic year as part of an effort to expand students’ financial aid literacy. The university, which has 95,000 undergraduates on its seven campuses, also started a personal finance course, introduced peer-to-peer advising, and added more information to the school website.

Undergraduate borrowing at Indiana through the Stafford program, the most popular federal loan, dropped to $249 million in the nine months through March from $279.6 million a year earlier, according to Education Department data. That 11 percent decline compares with a 2 percent drop in Stafford borrowing at four-year public schools nationally, mostly because of lower enrollment. Financial aid needs and enrollment at Indiana remained constant during that time, Kennedy says. Tuition and fees at Bloomington increased 1.8 percent for in-state students, to $10,208, and 2.8 percent for those from outside Indiana, to $32,350.

By the 2012-13 school year, all seven campuses also began requiring returning students to confirm on their school’s website that they want to take out loans, rather than just filling out an online federal form for student financial aid. Indiana’s undergraduate Stafford loan outlays dropped 8 percent that year. “We added more stopping points in the process,” Kennedy says. Students “have to step back and really understand how much loan debt they’re taking on.”

Seeing the cumulative amount of debt he’s acquired made Rigo Hernandez hesitant to borrow more. The 21-year-old chemistry major at Bloomington says he’s cutting expenses, avoiding purchases such as a new mobile phone, and contributing more to tuition from his summer job. He’s taken out $5,535 and would pay $2,091 in interest on that under a 10-year term, according to his letter. “When I saw the grand total,” he says, “it was eye-opening as to how much I borrowed, and eventually I’ll have to pay that.”

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