Knowledge isn’t as powerful as you might think when it comes to student loan borrowing.
Uninformed teens and college students are often cited as a major cause for the rise in student debt over the past several years. If these 17, 18 and 19-year olds only understood how much they were borrowing and what that would mean for them after college, the logic goes, they would make smarter borrowing decisions.
But a new study indicates that it likely takes more than information to change students’ borrowing behavior. Student loan borrowers at University of Missouri who received a letter detailing a personalized picture of how much money they’ve borrowed to date, their future monthly payments and other data bout their loans were not significantly more likely to borrow less after receiving the letter, according to research released last week by Rajeev Darolia, a public policy and education professor at the University of Missouri.
The findings add another wrinkle to the efforts of experts and policy makers to curb growing student debt with more information. Countless surveys show that student loan borrowers often regret their debt after they’ve left school indicating they might make different decisions if they had a more accurate picture of their loans. Experts and media outlets (including this one) spotlighted the use of debt letters as an innovative solution to this post-college buyer’s remorse.
Colleges’ efforts to be more transparent with their students about borrowing is certainly a welcome step, but Darolia’s research is a reminder to be skeptical of any silver bullet approach to tackling student debt. The letters in Darolia’s experiment may have been ineffective because they didn’t deliver the data in a way that students internalized. It’s also possible, though, that larger forces are affecting the way students borrow. College costs have grown over the past several years as wages have remained largely flat. The result is that families are increasingly turning to borrowing to finance school. Graduating college debt-free is a privilege of the largely white and wealthy few, as left-leaning think tank Demos, noted last week.
Students may not be changing their borrowing behavior once they receive the letter because they’re borrowing what they need to pay for school, even if that doesn’t appear to be a wise financial choice. An anecdotal example of this dynamic: When I wrote about this topic last year, a Twitter follower who got one of the letters at a different college said she simply cried upon receiving it.
“That’s a great initiative, more information is great,” Darolia, who is also a visiting scholar at the Federal Reserve Bank of Philadelphia, said of debt letter programs at other schools. “What this study suggests however is that by itself, information alone is probably not going to be sufficient to lead to large scale systematic changes in behavior.”
Still, helping borrowers be more informed consumers is a laudable goal, Darolia said, and he suspects students need more than letters to get true understanding of the implications of their loans. Resources like one-on-one counseling could help borrowers wade through all of the different factors they should consider.
“Student loan decisions are actually very complex, they require a pretty sophisticated understanding of a lot of complicated topics,” Darolia said. Evaluating whether a student loan is a good investment takes more than a simple cost-benefit analysis, he notes. Borrowers need to have a sense of how much they expect to earn when they graduate, how the interest will accrue and the different repayment plans available to them, to make an educated investment. “To put all of that together and make good decisions when often some of these students are very young, that’s very difficult,” Darolia said.
At Montana State University, officials provide borrowers taking on more debt than average with a slew of information that they hope will help them sort through whether their debt is a good investment. That includes details on how many classes they need to average each semester to graduate in four years, how many classes they need to pass and other academic information. At the bottom of the letter, there’s a warning to recipients that if they continue to borrow at their current rate they may struggle to repay their debt.
Providing that information makes sense given that college students need to think about their major, time to completion and other factors in addition to their debt load, said Carly Urban, an economics professor at Montana State who researched the effectiveness of the debt letters.
Urban and other researchers found the letters didn’t make much of a difference in students’ borrowing behavior, but they did push some students to approach college with a plan that would ensure they finished on time and with a degree. Students took more classes, got better grades and in some cases even changed their major to a more lucrative field, like science or business, after receiving the letters, she said.
The letters were successful at changing students’ behavior — if not their borrowing habits — partly because they began with language praising praised the students’ decision to borrow money to attend college and invest in their future, Urban said. The letter even goes so far as to note that college graduates live longer. “It’s almost like when you’re talking to a child, you say something good,” she said. “That’s maybe what’s getting them to read the entire thing.”
Peer pressure may have also influenced students to be more proactive about making a good investment, Urban said. At Montana State only those students who were borrowing more than average received a letter. “They’re getting this because they’re in ‘trouble,’” she said. “If you get the letter and your roommate, your sibling or someone else doesn’t get the letter you’re more likely to seek out those resources.”
In Darolia’s study, recipients of the letter were chosen at random from the pool of student loan borrowers at University Missouri, so some borrowers who didn’t necessarily need to adjust their borrowing also received the missives. Though Darolia’s study showed little change in borrowing behavior after students received the letters, he’s still bullish on the power of information to help influence students’ decisions. The letter did encourage students to seek more information from counselors and other sources, he added.
At Indiana University, which has become a model of sorts for the debt letter, officials view the notice as one part of a suite of programs aimed at helping students become better informed borrowers, said Phil Schuman, the director of the office of financial literacy at the school. Still, that hasn’t stopped some from pinning their hopes on the potential of a letter to shift students’ borrowing behavior. Indiana lawmakers passed a law last year requiring all colleges and universities in the state to send their students a letter detailing how their borrowing habits could affect them in the future. Nebraska followed suit .
The debt letter interests universities and lawmakers partly because it’s a solution to a seemingly intractable problem that’s easy to implement and “isn’t high maintenance,” Schuman said. But a notice alone likely isn’t enough to change behavior.
“The debt letter is a means to provide awareness to the issue for students and parents,” he said. “We want it to be a step in the process of tackling their debt.”