Student Loan Report: Confusion Reigns
Students and parents are so befuddled by financial aid that they end up making expensive mistakes, such as taking out unnecessarily expensive loans, according to a report by Consumers Union.
The Yonkers, N.Y.-based nonprofit called on government, schools, and lenders to provide more and better information.
Consumers Union said its interviews with students revealed widespread confusion and misunderstanding. A sophomore at a two-year college in the Boston area, for example, told CU: "You can just put [tuition] on your credit card, and you don't have to take out a loan," not realizing that credit card charges are loans with, typically, very high interest rates. A sophomore at a Los Angeles-area community college took out a private loan at 11 percent interest and was suspicious that there was "a catch" to the 6.8 percent interest rate for federal Stafford loans.
High school seniors and new college students "lack the personal financial sophistication necessary to make informed college funding decisions," says Michael Wroblewski, author of the report.
CU called for groups such as testing agencies to offer more information about financial aid so that high school students will start to learn about finances earlier. And it called on colleges to standardize financial aid offer letters so that students can more easily compare the true costs of different colleges. It said that lenders ought to explain rates, fees, and terms to students in plain English and that colleges ought to require more counseling about loans before they allow students to borrow.
The recommendations added to a flurry of financial aid activity on Capitol Hill. After much acrimony, the Senate Thursday night passed a bill halving interest rates on student loans over five years and boosting the size of federal Pell grants by $200 next year and $500 by 2012. The Senate also followed the House's lead and slashed the profits the government guarantees private lenders that make student loans. It also ordered the government to forgive the federal student loans of teachers, police officers, and other public servants.
Lobbyists said the Senate and the House would soon begin negotiations to reconcile their respective bills. Alexa Marrero, spokeswoman for a trade association representing nonprofit student lenders, said the proposals that are popular with both parties, such as increasing scholarships and banning college financial aid officers from accepting gifts from lenders, are likely to make it into law.
Matt Owens, a lobbyist for the Association of American Universities, said he expected that Congress would eventually require schools and lenders to provide more and better information to borrowers. In addition, he said there is wide agreement on proposals to simplify the Free Application for Federal Student Aid, or FAFSA, which is currently longer and more complex than the 1040 tax return.
The CU report is available here.
Full disclosure: As a resource for its findings, CU used www.financialaidletter.com, a website created by this reporter.