Student loan borrowers don’t know what they owe
Here’s the scene: you’re closing on your dream house. The bank’s approved you for a loan. They present you with a stack of paperwork and begin to explain the terms and conditions of your mortgage.
“Nah,” you say. “I’m good. Where do I sign?”
“Don’t you want to know what you’re signing up for? The loan amount? The interest rate? The good faith estimate? Anything?”
“Nope,” you say, clicking your pen excitedly. “Let’s do this!”
Hopefully that scene seemed pretty ridiculous to you. Of course you would want to know what you’re signing up for. A home loan is usually for tens of thousands of dollars. Why would you ever agree to an enormous loan without understanding the terms?
And yet, every year, across the country, thousands upon thousands of Americans sign up for loans and have no idea what they’re agreeing to. Those borrowers aren’t new homeowners, however. They’re teenagers signing up for student loans.
The Brookings Institution recently conducted a new study into student loan borrowing and the findings are shocking.
Students have no idea how much debt they’ve taken on
The Brookings researchers polled students at a public university regarding the cost of their first year of college. Only 52 percent were able to identify the amount of their first year loans within $5,000.
Freshmen students, meanwhile, who have only recently taken out their first student loans, showed the greatest misunderstanding regarding those loans. Approximately half of first year students seriously underestimated their new debt total, with only a quarter of new students able to correctly identify their loan amount within a reasonable margin for error.
Students don’t know what kind of loans they’ve taken on
Researchers also asked about loan type. Of all first year students with Federal loans, 28 percent didn’t know they had Federal loans, while 14 percent didn’t think they had any loans at all.
What does this mean?
There’s a certain sense of inevitability where student loan debt is concerned. A highly competitive job market means that college is almost mandatory at this point, and very few young adults have the means to pay for a college education out of pocket. So it’s understandable if teenagers and parents take the student loan process for granted.
But knowing what we know about the long-term impact of that student loan debt, it’s more critical than ever to make sure that student loan borrowers understand what they’re getting themselves into. When you see your student loan debt as some vague, future concept that you don’t really need to think about until you’ve graduated, you’re not putting yourself in a position to successfully manage that debt. The reality of exactly how big that debt is can be a harsh (and unexpected) wake-up call for young graduates with big dreams.
The trick to successfully handling student loan debt is to start long before you’ve got a loan to your name.
- Start thinking about your secondary education goals well ahead of time and create a plan to meet those goals.
- Start saving money early and often.
- Try to reduce your reliance on student loans by creating income while attending classes.
- Understand the terms and conditions of every loan you take out.
- When possible, favor Federal loans over private loans, as they generally provide more repayment and forgiveness options.
- Don’t simply accept the maximum loan value available – consider what you really need and take that amount.
Student loans are theoretically available to help young adults reach their dreams and their full potential. They’re supposed to create opportunity. But when young borrowers blindly grab loans they’re very likely to end up overwhelmed when those loans come due.
If you’ve got a student in your life who aspires to a college education, help them start planning today. If you need additional guidance, visit MappingYourFuture.org for tools and resources to help you prepare young students for college and beyond.
If you’re a student loan borrower and you need help understanding your obligations and your options, consider speaking with a trained student loan counselor. The sooner you get help, the sooner you’ll be able to successfully manage those student loan debts.