Last week, we wrote about the proposed Know Before You Owe Act of 2012. This week, we want to emphasize its importance by sharing some real-life consequences that can result when borrowers don't have vital information before they sign on the dotted line. (We apologize for the solemnity, but thinking about the effects of these consequences has made your Student Loan Ranger a bit somber.)
Recently, Young Invincibles and NERA Economic Consulting released findings from High Debt, Low Information: A Survey of Student Loan Borrowers, in which thousands of high debt student borrowers shared their experiences, including what they did not know when deciding to borrow, factors that influenced their decision making, and their sources of information.
A disturbing 65 percent of respondents misunderstood or were surprised by aspects of their student loans or the student loan process. Three of these aspects were repayment terms, monthly payment amounts, and interest rates.
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While the survey was composed of a self-selected sample, the following responses share the devastating effects of uninformed decisions and, sadly, a tinge of regret for pursuing higher education, given the resulting consequences.
Regarding repayment terms, a borrower of private loans amounting to $150,000 responded:
"I was incredibly surprised to find out what they had promised in repayment plans (and what I was planning on) was not actually what I was given as an option. I feel lied to, preyed upon and left without a chance in the world. Now, I must choose between food and paying my student loans—over half of my income goes toward my loans."
Regarding monthly payment amounts, a borrower with $75,000 in federal and private loans wrote:
"The only surprises I experienced was [sic] just how high my monthly payments for my private loans were. And now I can not [sic] find a way to lower the payments. My education is over, now the bank wants their money. My students [sic] loans cost me $600 dollars a month. I went to school to be able to escape poverty, now I feel I'll never be able to escape it."
The comments regarding interest rates cut to the core of how significantly uninformed decisions can impact one's future. A borrower with $110,000 in private loans wrote:
"I turned to private loans in order to pay for my education. I have been regretting that choice ever since. My loans are variable rate, not subsidized and ineligible for all of the student loan legislation that is being passed by our government. I made a mistake because I was young and uninformed…and I will be paying for the mistake for the next 20 years…if im [sic] lucky."
As noted in Sen. Richard Durbin's March 29 press release, about two thirds of private loan borrowers didn't understand the major differences between private and federal loans. We've talked about federal borrower protections like income-driven repayment, deferments and forbearances, forgiveness and fixed interest rates, and the lack of these protections for private loans. But how relevant are these distinctions and protections if borrowers don't know about them?
[Find out how to kick off student loan repayments.]
According to the report, more than 80 percent of all respondents learned about their loan programs from a college counselor or through a college website. Clearly, schools are in a unique position of influence. So, we think the report appropriately recommends a policy to "bolster and enforce the requirement that schools provide clearer guidance as to the differences between private and federal loans, and the terms for each." (We encourage you to read the entire report for more recommendations.)
The Know Before You Owe Act would do just that. And we hope these experiences help emphasize just how important that is, and how much proposals like the Know Before You Owe Act and the Know Before You Owe Campaign from the Consumer Finance Protection Bureau and Department of Education can affect not only borrowing decisions but the long-term effects of these decisions.
To learn more about existing student debt relief programs like income-driven repayment plans and Public Service Loan Forgiveness, register for one of our upcoming student debt relief webinars. And follow us on Twitter (use #studentdebthelp) and Facebook to stay informed.
Radhika Singh Miller is a program manager for Educational Debt Relief and Outreach at Equal Justice Works. In 2008, she served on the Student Loans Team in the Negotiated Rulemaking for the College Cost Reduction and Access Act (CCRAA) and has extensive knowledge of this landmark educational debt relief legislation. Radhika graduated from Loyola Law School Los Angeles. Prior to joining Equal Justice Works, she was a staff attorney at the Partnership for Civil Justice, focusing on constitutional and civil rights litigation and advocacy.