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Evaluation White Paper

Student Loans

Student loans are a large investment often made by 18- or 19-year-olds beginning their postsecondary education pursuits. These young adults often have little experience with credit, lending, and financial markets in general. They are not informed about how to make initial decisions on how much debt to assume for financing a postsecondary education. One option is for students to take out the maximum allowable loan amount offered. This option, however, may not be optimal for students, given different background characteristics such as the choice of a major, the expected time until graduation, and the number of hours students decide to work while attending an educational institution.

Another group obtaining student loans at an increasing rate are adults who have spent years working and for various reasons (e.g., career change, better income) return to complete a postsecondary education started when they were younger or are seeking further education. While “older” adults have more experience with financial markets, they face different decisions surrounding student loans. They may even have more options for financing their higher education including obtaining home equity loans, dipping into retirement savings, selling assets, or using precautionary savings. These decisions are not obvious and can be a teachable moment. It appears that only limited study has been conducted on this smaller group of adults returning to complete a postsecondary education or expand it. Accordingly, the remainder of this section will focus on the large group of adults (18- or 19-year-olds) who are just starting their postsecondary education.

Student loan debts have reached $1.39 trillion according to FinAid’s student loan debt clock. In addition, debt per borrower for four-year graduates has risen to nearly $35,000 (Ziv, 2016). Even more shocking than the sheer amount of student loans is the increasing rate of delinquency: 11.5 percent of student loans were 90 or more days behind on payments in the fourth quarter of 2015 (FRBNY, 2016).

7A. Key Programs and Resources

Some states require that high school students complete a course on financial education prior to graduation (CEE, 2016). In a few states, these courses contain information on debt, including borrowing, repayment, and the costs of default directly in their curricula.

Prior to entering college, students determine their initial student loan amounts by completing the Free Application for Federal Student Aid (FAFSA) to determine their federal aid eligibility. If submitted, students can qualify for federal grants and low interest federal student loans. There are some groups that provide assistance in completing the FAFSA, such as high school counselors and high school events that involve parents, and college access programs. Tax agencies have in some circumstances added FAFSA guidance in their tax preparations. The U.S. Department of Education has an office of Federal Student Aid that provides information about financial aid options.

There are financial aid calculators that are provide by non-profit organizations such as FinAid. Online financial counseling is required by law for all students receiving federal financial aid. Another possible resource is financial counseling for students making student loan decisions or having student loan debt problems through such organizations as National Foundation for Credit Counseling.

Colleges are beginning to implement interventions that provide counseling for student loans, where sessions include creating a budget, deciding on a major, determining expected future salaries, and deciding on future loan amounts. These sessions also can advise students on ways to apply for more scholarships and increase their non-loan aid. Other resources available are post-college fact sheets or college exit seminars that explain different repayment plans.

7B. Major Topics and Literature Review

Heterogeneity across students makes it difficult to define one-size-fits-all policies that unambiguously improve well-being for all students. There are three particular outcomes that generate the most attention. A first outcome is that financial interventions may affect retention. Students with more financial education may understand that investing in their education is worth the benefit of the future earnings. This suggests that financial literacy improves retention in college. However, other students may quickly realize that college education is costly and the probability of completing and finding a job that requires a college degree is low. They may leave school earlier, decreasing retention. While the effect of financial education on student retention is ambiguous and potentially different for different types of students, college administrators and policymakers are increasingly fixated on graduation rates.

A second outcome financial education could change is the rate at which students complete financial aid applications. For most students, filling out the FAFSA can improve the probability that they obtain federal aid in the form of grants and low interest student loans. Some of these grants, such as Pell grants, have no obligation of repayment and can unambiguously help students finance their education. Any outcome that captures the likelihood that students apply for scholarships can be thought of as an improvement in student outcomes. Given that only a few states require a personal finance courses that directly discusses student loans in high school curricula, preparation for FAFSA completion could be low.

A third outcome is the probability that one defaults on his student loans. If students optimally choose their loan amounts and graduate from postsecondary education institutions, they should not default on their student loans. Missing student loan payments can cause individuals to lose their tax refunds and future Social Security payments and damage their credit scores. While online counseling is required to precisely combat default, students often click through the screens rapidly, retaining little information (Fernandez et al., 2015).

Research suggests that filling out the FAFSA is sufficiently complex to prevent students who need aid from completing the application (Dynarski & Scott-Clayton, 2006). Bettinger et al. (2012) confirmed this with a randomized experiment, where some individuals were assigned assistance with completing the FAFSA at tax time and some were not. The group that received the assistance were more likely to complete the FAFSA, received more federal aid, and were even more likely to enroll in college.

A growing body of literature studied a variety of interventions targeted at college students that provide financial counseling to those with loans. Schmeiser, Stoddard, and Urban (2016) studied the effect of a warning letter targeted at students with high debt levels for their standing in college that also provided academic information and an incentivized offer for financial counseling. While the letter did not change future loan amounts, it improved retention for these high-debt students.

A separate debt letter intervention at the University of Missouri sent information to a random sample of undergraduates on their loan amounts, future payments, and the average loan amount for undergraduate students (Darolia, 2016). While the letter did not change loan amounts, it did encourage students to seek out more financial information by visiting the financial aid office.

Brown et al. (2016) studied the effect of state-level personal finance mandates on student loan amounts. The authors found that states that pass personal finance mandates have higher student loan debt. However, personal finance mandates do not necessarily require that high school students must complete a course prior to graduation. It is also hard to determine if an increase in student debt is a greater investment of students in their education or a result of students just taking out the maximum allowable student loan amount.

7C. Evaluation Practices, Strengths and Limitations

Evaluation in the student loan space is plagued by a lack of data. While a large set of literature determined the effect of nudges (e.g., reminders) and defaults (e.g., changing the offered initial loan amounts), few studies have been able to tie together financial education and student loans. No research has studied the effect of financial education on student loan default rates. This is because student loan default data is often only available at the aggregate level, meaning it is reported for colleges as a whole, instead of individually for each student. Federally required education products, such as online education prior to obtaining federal student loans, are difficult to evaluate since they are required for everyone. This precludes researchers from determining what would have happened in the absence of the policy. Finally, the education interventions for students making decisions about financing college are often expensive. However, the assignment into the group receiving the education is random, or quasi-random, allowing evaluators to causally identify the effect of the program on the desired outcome.

7D. Public Communication

While there is little research that is able to determine the effects of financial education on young adults’ decisions around student loans, 18 year olds entering college have little experience with credit and borrowing. Thus, this financial situation should provide a teachable moment for individuals to improve their financial decision-making for the rest of their lives. States such as New Jersey are attempting to pass legislation that will include student loan decisions in high school personal finance courses (Flammia, 2016). These types of policies could help to increase the rate of FAFSA completion, grants received, and college attendance. However, more evaluation is needed to fully understand the effect of high school financial education on student loan decisions.