July 19, 2007
Student Loan Disclosures and Counseling
YONKERS, NY – As Congress debates legislation to overhaul student loan programs, Consumers Union, the nonprofit publisher of Consumer Reports, released a report finding that many students and parents don’t have access to the information they need to determine the best way to pay for college. The report, funded by The Pew Charitable Trusts, offers policy recommendations to help families find the most affordable options for paying for college.
“Financing a house or a car can be confusing, but it’s nothing compared with trying to pay for a college education,” said Jim Guest, President of Consumers Union. “Families need access to clear and unbiased information to help them make smarter choices about how to pay for school.”
The report is particularly timely given recent investigations by the New York Attorney General and others documenting how some financial aid offices have received kickbacks and other gifts from lenders and recommended lenders even if they are not the best choice for students. The U.S. Senate Health Committee issued a report in June concluding that illegal student loan marketing activities are “systemic and cannot be isolated to a few ‘problem’ lenders or schools.”
Consumers Union conducted market research in five metropolitan areas with over 130 students and parents to identify common challenges families face navigating the college financing system. Their research showed that students and parents often could not identify the best-priced loan, or understand how loan repayment obligations can affect their future choices when shown information currently used by colleges and universities, lenders, and the Department of Education. Using feedback from consumers and financial aid experts, Consumers Union developed practical policy recommendations to improve student loan counseling and loan disclosures, including:
– Requiring colleges to use the same definitions and formats in financial aid award letters to disclose the cost of attendance, the financial aid offered, and the costs associated with various types of loans.
– Requiring lenders to provide – in plain language – the rates and terms of a private educational loan earlier in the application process so that families can shop around for the best-priced loan.
– Requiring that students receive annual financial aid counseling before loan funds are disbursed, rather than just at the beginning and end of college.
Colleges currently calculate the cost of attending school in different ways, so comparisons are difficult. College financial aid award letters don’t always make clear the difference between grants, which don’t need to be repaid, and loans, which do. Colleges often miss opportunities to help families minimize loans, secure low-cost financing, or figure out the bottom-line cost of loans.
Private-loan lenders exacerbate these problems by failing to adequately disclose important terms and rates that families need to compare loan options. For example, lenders aren’t required to tell students about how high payments on variable interest rate loans can balloon if their interest rate rises. And students and parents often don’t get required disclosures until right before they sign for the loan.
Nearly 50 percent of undergraduate private educational loan borrowers fail to exhaust their low-cost federal government loans before turning to more expensive private loans to pay for college. Consumers Union recommends that parents and students tap federal loans first, since nearly everyone qualifies. Families should limit taking out private educational loans since they cost more and have less flexible repayment plans than federal loans. And college should never be financed using credit cards.
“Helping Families Finance College: Improved Consumer Disclosures and Counseling,” was made possible through an investment by The Pew Charitable Trusts as part of its efforts to help American families improve their financial security. To review a copy of the report, including the full set of Consumers Union’s policy recommendations for helping families make more informed college financing decisions, see: http://www.consumersunion.org/pdf/CU-College.pdf
Michael Wroblewski: 914-378-2127
Michael McCauley: 415-431-6747, ext 126